Martin Currie predicts value stocks to shine in 2018

Reece Birtles

Reece Birtles

Martin Currie Australia, a leading Australian equity affiliate of the global fund manager Legg Mason, says low volatility, high-quality, high-growth stocks could suffer in a growing economy – as well as being vulnerable to increasing discount rates from higher bond yields.

In its 2018 Active Outlook report, Reece Birtles, Chief Investment Officer, Martin Currie Australia, says: “It’s our firm belief that cyclicals and value stocks that have been more economically sensitive in the post-GFC environment are likely to start to outperform high-growth and low-volatility stocks.

“Our market outlook at start of 2017 for strong growth and increasing bond yields went against consensus. We believed that the Chinese economy would not slow, and would in fact benefit from Government stimulus. We held the view of rising oil and base metal prices, and also expected Australian GDP growth to accelerate.”

“Based on this and our bottom up stock analysis, our Value Equity portfolios have been positioned in more cyclical names such as consumer, non-bank financials and resources sectors. These stocks should be rewarded as our view has become more consensus going into 2018.” Stocks in its portfolio that fit this criterion include retailer JB Hi-Fi, leading dairy products company Fonterra, and the financial services group IOOF.

Setting the macro-economic scene for the Australian equity market this year, he says: “Lead indicators of global economic growth such as PMI (World Purchasing Managers’ Index) point to an accelerating level of growth, the strongest in more than a decade.

“We believe these conditions could persist for a time given the current low base of post-GFC world growth; current conditions are more akin to an early cycle pick-up than late expansion.

“We’re now 18 months into the expansion. Capacity utilisation and employment are tightening, increasing pricing power and ultimately inflation. We believe that this economic environment indicates the potential for double digit EPS growth for global equities.

“In this global economic environment of steadily improving growth, the outlook for the Australian economy is more positive in the medium term as our cycle lags the US recovery.

“Our multi-lensed investment approach of Valuation, Quality, Direction and Sustainable Dividend places us in a strong position to navigate the economic environment going forward.”

Birtles says Martin Currie’s belief that governance is critical to a company’s sustainability will ensure it remains a key research focus. Longer term, the fund manager sees cybersecurity as being vitally important to its research and how it engages with companies.”

Over the past 12 months through December 2017, the Legg Mason Martin Currie Select Opportunities Fund, which follows the Value Equity strategy, delivered a strong net of fees return of 17.7%, outperforming the S%P/ASX 200 index return of 11.8% and over 3 years it delivered a net return of 13.31%.

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