Reserve Bank Board meeting

• The Reserve Bank Board has left the cash rate at 4.75 per cent for the eighth straight month (covering seven formal meetings). The next meeting is on August 2 2011.
• The Reserve Bank has become more “dovish” – that is, it has backed away from rate hikes. Economic growth “is now unlikely to be as strong as earlier forecast.” And the Reserve Bank has reiterated its view that only a gradual lift in underlying inflation is “expected over time.”

What does it all mean?

• The Reserve Bank has discovered its “dovish” side, acknowledging the weaker outlook for the economy and inflation. You only lift interest rates if you feel that a strongly-performing economy will generate inflationary pressures. And that is clearly not the case at present. Employment has been falling, home prices are going backwards and consumers refuse to spend. As a result, most businesses are cutting prices to move stock, resulting in lower margins and profits. And as a consequence, the underlying rate of inflation has continued to fall – not rise – hitting a 6½-year low.
• The Reserve Bank finally gets it. While the Bank continues to note the positive broader benefits to the economy of the ‘terms of trade’ boom, it realises that people can’t see the gains. For instance our trade surplus with China has increased by over $14 billion over the past year or around $650 for every man, women and child. Now if those dollars were actually paid out, it may be different. But the increased profits for miners boost share prices and dividends and are reflected in the average worker’s compulsory superannuation. Unfortunately for many people they won’t see those gains for 30 years.
• For the past 14 months consumers and businesses have been on tenterhooks, bracing for the Reserve Bank to lift interest rates. But the Reserve Bank Board has seen fit to lift rates only once in that 14 month period. And, in hindsight, that decision is looking more and more questionable.
• A nirvana situation would be where a boom in mining areas was offset by weakness in consumer spending in capital cities, leaving the Reserve Bank with nothing to do but monitor the situation. It may not be nirvana, but so far that nice balance between hot and cold areas of the economy has been playing out.
• Last week we changed our interest rate views. It turns out to be the right move. Previously we envisaged that rates could rise twice over the second half of the year, but now we are only pencilling in one move over the next five months. The Reserve Bank is weighing up a number of factors and much depends on how the balance of forces behaves.

Interest rate decision and past cycles

• The Reserve Bank Board has left the cash rate at 4.75 per cent for the eighth straight month. In October 2009 the cash rate stood at a 49-year low of 3.00 per cent. But then the RBA embarked on a process to remove the emergency stimulus, lifting the cash rate by a quarter of a percent in October, November and December 2009, and then in March, April, May and November 2010. There has been only one rate hike in the past 14 months.
• In the last rate-cutting cycle the cash rate fell to a low of 4.25 percent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent.
• In response to funding pressures, banks were forced to lift rates above the cash rate. As a result, the Reserve Bank now looks more closely at the variable housing rate to gauge how close rates are to “normal”. Currently the average bank variable housing rate stands at 7.80 per cent, well above the long-term average or “normal” rate of 7.15 per cent.
• Financial market pricing suggests that there is a 17 per cent chance of a 25 basis point rate hike within the next five months. Most economists tip at least one rate hike over the coming year. Conditions can change quite quickly – a case in point was when markets factored in a rate cut after the Japanese earthquake and tsunami. CommSec currently factors in just one 25-basis point rate hike over the remainder of 2011 but this would require signs of stronger economic growth and higher inflation for the forecast to be validated.

What are the implications of today’s decision?

• The focus now shifts to June quarter inflation data (Consumer Price Index) to be released on July 27. The TD Securities/Melbourne Institute Monthly Inflation Gauge has indicated that underlying inflation stands at a 6½-year low of 1.6 per cent. If that result is reflected in the official inflation data then the Reserve Bank will have no reason to move rates in any direction.
• The extended period of interest rate stability should benefit housing-dependent companies. In the building materials sector our analysts have BUY recommendations on Adelaide Brighton, CSR and James Hardie. Our analysts also maintain a BUY rating for REA Group. Our analysts continue to favour Consumer Staples over Consumer Discretionary stocks with BUY ratings on both Wesfarmers and Woolworths.

The Statement

• The statement from today’s July 2011 meeting is below. Emphasis has been added to significant changes in wording in the recent statement.

MEDIA RELEASE

STATEMENT BY GLENN STEVENS, GOVERNOR

MONETARY POLICY

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing. The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months.

A key question is whether this more moderate pace of growth will continue. Commodity prices have generally softened of late, though they remain at very high levels. Despite the challenging international environment, the central scenario for the world economy envisaged by most forecasters remains one of growth at, or above, average over the next couple of years. A number of countries have tightened monetary policy but, overall, global financial conditions remain accommodative and underlying rates of inflation have tended to move higher.

Australia’s terms of trade are now at very high levels and national income has been growing strongly, though conditions vary significantly across industries. Investment in the resources sector is picking up strongly in response to high levels of commodity prices and the outlook remains very positive.  A number of service sectors are also expanding at a solid pace. In other areas, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

A gradual recovery from the floods and cyclones over the summer is taking place, though the resumption of coal production in flooded mines continues to proceed more slowly than initially expected. The recovery will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way, but growth through 2011 is now unlikely to be as strong as earlier forecast. Over the medium term, overall growth is still likely to be at trend or higher, if the world economy grows as expected.

Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near term. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

Credit growth remains modest. Signs have continued to emerge of some greater willingness to lend and business credit has expanded this year after a period of contraction. Growth in credit to households, on the other hand, has slowed. Most asset prices, including housing prices, have also softened over recent months.

Year-ended CPI inflation is likely to remain elevated in the near term due to the extreme weather events earlier in the year. However, as the temporary price shocks dissipate, CPI inflation is expected to be close to target over the next 12 months. In underlying terms, inflation has been in the bottom half of the target range, though a gradual increase is expected over time.

At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

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“Our success comes from a focus on companies successfully executing growth strategies,” said John Robertson of E.I.M. Capital Managers.

“But from the beginning we also had a strong belief we were investing in a cyclical industry.  We expected to confront extreme volatility from time to time and positioned the portfolio to cope.

“We could not avoid the volatility in the market in 2008 and 2009 but our portfolio comprised stocks that could survive, recover and thrive,” said John Robertson.

In choosing stocks, E.I.M. searches for companies with the following characteristics:

• a resource base sufficient for long-life operations
• potential for growth
• a technically robust operational plan
• the necessary people and expertise
• a low cost structure

E.I.M. remains committed to the idea of having a portfolio positioned for volatility and continually stress tests its investment opportunities against the possibility of a major cyclical downturn.
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“We do not know when it will happen but history says we would be extraordinarily naïve to assume that after hundreds of years the cycles have suddenly disappeared,” said Mr Robertson

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Russell Investments is aiming to capture the inherent value premium in the Australian stock market with the launch of its second Australian ETF, the Russell Australian Value ETF (ASX code RVL).

RVL taps into Russell research on value premiums which shows that over time passive value based strategies have typically delivered a premium of 1.5%-3% over the broad market in Australia.

There is also a growing investor desire to capture this premium, creating a compelling opportunity for Russell to bring this opportunity to investors in the easily accessible form of an ETF.

“Before launching RVL, we talked to a range of investors to see what they wanted and found there is a gap for something which provides an easy way to access this part of the market,” said Scott Bennett, portfolio manager at Russell Investments.  “Russell pioneered style based indexes back in 1987 and we are excited to utilise our well regarded index capabilities and decades of experience to develop a local solution for the Australian market.”

RVL will provide exposure to a specially developed index, the Russell Australia High Value Index. The index works by taking the Russell Australia Large Cap Index and assigning all stocks a value score and a growth score based on price to earnings ratios and medium term earnings growth. From this each stock is given a total value score, which then determines the weight of each stock in the index.

First style-based ETF in Australia targets institutional investors

RVL will be the first style-based ETF to hit the Australian market and will have specific applications for institutions. It will aim to complement rather than compete with managed funds and can potentially be used as a plug for an active manager, while a new manager is being found.  Alternatively for fund managers who only want a value exposure at certain time, the ETF can be a quick and easy way of tilting a portfolio towards value.

“We have spoken extensively to institutions about their needs and potential future use of ETFs and discovered there is a gap in the market for a flexible, value-style tool,” said Mr Bennett

Another specific institutional use for RVL is for short term cash management. RVL provides a more targeted, easy to implement, exposure to help institutions manage shorter term cash positions.

RVL can also be used by managers who want to short value stocks, as opposed to accessing the exposure through a managed fund where it is only possible to go long.

In addition, RVL is well-suited to advisers and brokers, particularly those with a style based approach.

“As with our first ETF, we have invested heavily in researching what investors, in particular institutions want from an ETF and have developed this tailored solution. As Australia’s first style-based ETF, we are hoping to provide an easy way to access the value premium in the Australian market,” Mr Bennett concluded.

Russell’s approach to building ETFs based on investor needs has resonated well with investors. Russell’s first Australian ETF, the Russell Australia High Dividend ETF (RDV), has amassed over $140M assets under management since its launch less than a year ago.

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At the moment, there is much talk about inflation in Asia, especially in China and India. How big an issue is it when it comes to investing in the region?

China and India are high-growth countries and because of that they tend to have inflation. There are times when inflation spikes but the reasons vary. One type of inflation that people get particularly concerned about is food inflation. Food inflation is usually temporary in nature. It will usually be about a bad crop or a shortage of supply. So I’m not that worried about food-related inflation; it’s usually resolvable. Other factors could be more of a concern. The thing to note is that authorities across the region are taking steps to limit inflationary pressures.

What we focus on when looking at economies experiencing inflation is finding companies with pricing power – those that can boost their prices to maintain their profitability. We try to avoid companies that are price takers; that do not have that ability to raise their prices during inflationary times because their earnings will suffer.

What’s driving the record increase in IPOs in Asia?

The IPO boom is because many companies in Asia are looking to expand their businesses. It gives you an idea of the kind of dynamism that’s going on in Asia. The managers of these companies see growth opportunities and they’re looking to grow their capital and invest that capital to take advantage of the earnings potential that is there in Asia.

The consumption story in China is gaining adherents. How are you playing this theme?

There’s a great thematic in investing in the consumption sector within China because of the strong wage growth that’s coming through. With minimum wages growing 20% and the average wage earner seeing 15% to 16% wage growth, consumers are driving the economy more. People are moving beyond a subsistence lifestyle and for the first time are buying items such as fridges and televisions and so on.

The way I’m taking advantage of this theme is to invest in some Hong Kong-listed companies that have businesses that are growing strongly in China and that are expanding the number of stores they have there. I’m investing in some of the department stores within China as well.

Korea has several global brands. Can China replicate this achievement?

South Korea has developed some great global brands. Companies such as Samsung, Hyundai Motor and LG Electronics have been highly successful across the globe. China has the potential to develop similar brand names over the next five to 10 years. We’ve noticed how much money some Chinese companies are spending on R&D. The fact is that the Chinese companies don’t want to be the low-cost producers forever. They want to add more value to what they’re producing. As they step up that value chain, they will create brand names, locally at first, and potentially globally.

Corporate governance in Asia is a risk. How do you manage it?

Corporate governance in Asia is a challenge that we have to deal with. Our approach is to make sure that we have identified who the management are, how long they’ve been there and who the owners of the company are. We spend time with management teams to understand whether they are just focused on making money for themselves or for shareholders as well. We want to see if there are other agendas that the managements want to achieve – things that might be good for their egos but perhaps not good for the share prices of their companies. Our focus is really to identify companies that are running good businesses and delivering on the potential.

One of the great things happening within Asia is the adoption of international financial reporting standards. That means that you can compare companies within Asia and properly rate Asian companies against global peers. Most of the developed markets in Asia already comply with these reporting standards. Countries such as India and Indonesia are adopting them over the next couple of years.

How important are smaller countries in the MSCI Asia ex-Japan Index such as Indonesia, Thailand and the Philippines?

The smaller countries within Asia don’t get the same kind of profile as China and India but they are a key part of what’s going on in Asia. Indonesia, Thailand and the Philippines are all countries that have got big populations and are achieving improvements in the standard of living. Their GDPs are growing at healthy rates and wage levels are rising. These countries are urbanising. They are microcosms, to some extent, of what China’s already done. We see that to be a reason for investing in some of the companies in these countries.

How is the Fund positioned at a country level?

The Fund is overweight Hong Kong and Thailand while the key underweights are to Taiwan and Malaysia. Hong Kong is favoured at the moment because I see some of the Hong Kong-listed stocks as doing well out of China. The valuations are more attractive and there are fewer regulatory risks with some of the Hong Kong stocks than there are in Chinese stocks. Taiwan’s a mature market, one with a high GDP per capita. The growth rates are still reasonable but a lot of Taiwan’s growth is about exports, either to China or elsewhere. I see Taiwan’s competitors as being more attractive than the companies in Taiwan.

Chinese internet company Baidu is a large overweight in your portfolio. Can you tell us why you are so positive on the stock?

Baidu is effectively Google for China where there’s a good long-term growth story for internet usage. It does internet search and has over 85% market share for search in China. Google is the second-biggest player and Google has said that it is leaving China because it doesn’t want to be censored anymore.

Baidu has around 72% revenue share of search in China. We think given Baidu’s market positioning the company’s revenue share will become more reflective of its market share in search; in fact, even in excess of its market share. We expect Baidu’s market share in search revenues to become more like 85% to 90%, given the company’s dominance in the space.

Another overweight is Hyundai Motors. Can you tell us your investment thesis on this company?

There are three key reasons for owning Hyundai Motor. The first is the company has a really strong base at home in Korea that’s growing healthily. Another is that the company has fantastic exposure to the emerging markets of China, India, Brazil and Russia, where they’re achieving strong market shares. In addition, Hyundai is growing market share in the developed markets thanks to improvement in the quality of the cars and its brand. Market share has risen from around 3% to 8% in Canada, for example. Hyundai’s market share is now around 6% in the US while in Europe it’s grown from around 2% to 4% in recent years.

What can investors expect from Asia in coming years?

I’m optimistic about the outlook for Asia over the next couple of years and over the next five to 10 years as well. We see that Asia will achieve faster GDP growth than the rest of the world. I think that investing in Asian companies is a great way for investors to take advantage of this expected growth. These companies have strong balance sheets and good cash flows. They are investing in their businesses, developing great products and building brand names. We look for the companies that can take advantage of this growth and deliver earnings-per-share growth to the shareholders.

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More than a decade later, Lonsec celebrates the model portfolio’s strong track record in providing advisers with a low-cost, direct equity portfolio solution that has historically delivered excellent returns.

The manager of Lonsec’s Portfolio Services division, Jeremy Pree, commented, “Whether it’s been a bull or bear market, the model portfolio has consistently outperformed its benchmark, returning 16.2% per annum since inception [as at 31 January 2011], outperforming the S&P/ASX-
100 Accumulation Index by 7.0% per annum over the past ten years.”

“We think this is worth celebrating since there are few equity model portfolios available today with a comparable track record,” said Pree.

The longevity of Lonsec’s model portfolio can be attributed to its high-conviction approach, which was identified at inception as a successful strategy to deliver alpha.

“Highly concentrated portfolios are increasingly prevalent in today’s marketplace, however, ten years ago there were few direct equity model portfolios with less than 20 stocks,” said Pree.

The success of this model portfolio can also be attributed to Lonsec’s medium-term top-down macroeconomic and sector-theme approach to stock selection and portfolio construction rules, which have resulted in low portfolio turnover, averaging between 20-30% per annum.

“A low-turnover outcome supports the case that direct equity portfolios can provide financial advisers with a low-cost and tax efficient solution,” said Pree.

In September 2010, Lonsec increased the number of stocks in the model portfolio from 12 to 15, making the first significant structural change since inception. The expansion aims to strike a better balance between portfolio risk and potential return.

Pree commented, “The 12-stock Lonsec Core model portfolio has outperformed its benchmark consistently, but we believe the expansion to 15 stocks will help reduce volatility without reducing the strong alpha potential. Feedback from advisers suggests the revised portfolio has broader
investor appeal.”

“The benefit of having a few more stocks is expected to provide greater risk controls to minimise volatility within model portfolios. Volatility is the enemy in this post-GFC world and we feel that enhanced risk management will limit the effects of market volatility.”

The Lonsec Australian Equity Core Model Portfolio is available to financial advisers through Lonsec’s stockbroking and managed discretionary account services, and through partnership with external MDA and SMA platforms BlackRock, OneVue, WealthPortal, UMA Select, Wilson HTM
and more recently, Hub24.

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Head of BT Wrap, Chris Freeman, said the reports build on the enhanced Dealer Group DeskTop launched last year, as part of BT Wrap’s model portfolio offering, and will make it easier for dealer groups to support their advisers through better visibility of their total holdings.

“The latest product release demonstrates BT Wrap’s ongoing commitment to providing market leading platform functionality which has already delivered a market leading equities trading centre, bulk trading, consolidated order screens and model portfolio tools in the last 12 months,” he said.

“This week’s roll-out includes two new desktop reports and three bulk reports that will drive efficiency for dealer groups, their advisers and their clients.

“The reports provide a range of summary options, including the ability to view results across single or multiple badges, allowing the dealer group to provide better business-building strategies as well as support services such as compliance and legal to their advisers.”

“For example, dealer groups will be able to have immediate visibility of the impact changing a stock in their APLs and respond and tailor accordingly. Another benefit is managing the impact of a frozen fund or significant drop in a unit’s value. By having immediate access to their group exposure, as well as individual adviser impact, the dealer group can target advisers and clients with immediate information and support.”

Head of Distribution & Alliances at Genesys Wealth Advisers, Pia Zulueta, said the variety of reports will allow them to more meaningfully track their business and tailor support services to their advisers.

“With real-time data and a huge array of inputs the benefits will be multi-fold. As a dealer group we will be able to quickly identify trends, understand the impact of business decisions and correlate market data to our own. The visibility to the licensee and the support it will provide our advisers will be hugely beneficial,” Ms Zulueta said.

The Dealer Group DeskTop badge reports include:

• Total Wrap business report: A summary of total Wrap business across various products as at COB of the prior full business day including total funds under advice, average client balances and loans and breakdown of total holdings across managed funds, term deposits, equities and cash.
• Periodic summary report: A summary of movements in total Wrap business across pre-determined periods including opening and closing balances, total deposits, withdrawals, transfers and distributions.
• Bulk reports: A summary of monthly investment flows, clients holding

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Investors like the Nestlé Story – reaching consumers in the emerging markets and developed economies are targeting over 40% of their sales coming from the emerging and developing economies.

Which is the best, most cost-efficient way to buy into Nestlé?

“Buying into emerging and developing countries is different from gaining access to their consumer through an international stock. A safer route to the spending power of the emerging market (middle class) consumer is through proven international brands that are in place already in these countries. Also worth noting is that, in the case of Nestlé, its consumer  brands appeal to aspiring customers to supposedly superior international brands over their local rivals,” said Monik Kotecha, CIO, Insync Funds Management

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The nice surprises are going to come from the mining companies in line with higher commodity prices while the nasty surprises will most likely come from the retail sector. Companies leveraged to the US recovery such as News Corp and Westfield will be ones to keep an eye on as they should show continued bottom line improvements, according to CMC Markets’ Market Analyst Ben Le Brun.

His predictions and tips are summarized below:

Increased dividends for miners as emerging markets drive commodity prices

• Emerging markets and improved global economic conditions should continue driving commodities prices, leading to plenty of upside for mining companies. Fears continue about the impact of tighter monetary policy in China, but remember any tightening makes their growth more sustainable.
• Excitement is building around BHP and Rio Tinto as share buy backs and increased dividends look more likely. Investors love increased dividends and if this takes shape I expect further upside in both stocks.

Watch retailers for real revenue growth

• Danger looms for a few retailers and some have already issued profit warnings eg Woolworths. It is a case of whether fund managers have been pessimistic enough on stocks that have been sold down lately. Softer consumer spending is an ongoing issue, coupled with weaker than expected Christmas sales.
• Look at a company like JB Hi Fi. Although their earnings were average, the stock price rallied after their figures were announced, as it appeared analysts had over shot the mark in terms of pessimism.
• Look for revenue verses earnings per share when dissecting results as you need to be wary of improved operations through cost saving – it does nothing to increase sales, which is what the market really wants to see.
• It will be just as important to analyse futures earnings guidance and current market conditions as well as the headline figures – consumer spending in Australia is expected to remain soft.

Don’t forget flood damage

• Most of the damage from the QLD floods has been documented now and it is time for some companies to confess how badly it has hurt their bottom lines. Theoretically this should have already been priced in, although we will see whether it actually has. All eyes will be on companies such as Suncorp, whose results will put a tangible number on how the floods have actually impacted companies bottom lines.

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ASSET ALLOCATION

Trevor Greetham, Director of Asset Allocation

Growth among developed economies remains tepid, with availability of credit the limiting factor. Housing markets are weak and the tailwind from the rebuilding of depleted inventories is petering out. I expect other central banks, led by the Bank of England, to follow the example set by the Fed by printing more money.

In contrast, I expect emerging market authorities to continue to tighten their monetary policies. Their growth was not credit-constrained and spare capacity is scarce. Further US dollar weakness associated with QE2 will also provide stimulus to these economies, at a time when inflationary pressures are already mounting.

A decoupling from weak developed economies should also support further strength in emerging market currencies. Stocks in emerging markets are also likely to do well as long as authorities are not forced to tighten too much.

Commodities also seem likely to do well if weak US growth leads to further Fed liquidity injections. They are also likely to perform well if US growth recovers, as demand will remain strong for some time even if emerging market governments tighten policy aggressively. In the weak US economy scenario, gold will probably continue to do best as investors use the metal to hedge both inflation risks in the emerging markets and fears of currency debasement in the developed world. Industrial metals would probably do best if global growth picks up in a synchronised way.

I think developed market stocks could surprise positively once the industrial cycle picks up but it could take three to six months to work off excess inventories and ramp up production. I am relatively cautious on the eurozone as the European Central Bank appears unwilling to print money or engage in competitive devaluation. Spain will be the key to a more positive outcome, as its economy is too big to rescue with ease. However, it is a major manufacturer whose exporters would benefit from improved global demand and a recovery in growth would provide a boost to confidence for the entire region.

Until such time as growth in the developed world becomes more tangible, bond markets could continue to fare better than equities. However, once a strong global growth trajectory is established, yields are likely to rise from low levels, exposing investors to capital losses they are not accustomed to.

With the global economic cycle likely to remain short and asset prices volatile, it will be important to maintain a well-diversified portfolio in 2011 – and to be flexible in terms of asset allocation, taking advantage of the tactical opportunities that will undoubtedly arise as policy actions announced towards the end of 2010 begin to take effect, for good or for ill.

ASIAN EQUITIES

David Urquhart – portfolio manager Fidelity Asia Fund

Asia continues to grow healthily although the pace of growth in 2011 is likely to moderate from the strong rebound in growth seen from 2009 and into 2010. Driven by solid domestic demand, the region is expected to deliver GDP growth of around 8% in 2011 (versus 9% expected for 2010). Despite the slow growth of Asia’s traditional export destinations, North America, Europe, and Japan, trade within the region has rebounded remarkably strongly after a precipitous fall in 2008. A large part of this rebound has been intra-region exports of final products. Demand from within the Asian region, and in emerging markets globally, is playing a bigger role in this upswing. In addition Asian brands (ex Japan) are continuing to take market share from US, European and Japanese brands. The advantage of lower production costs continue, allowing Asian companies to deliver to customers better value-for-money. In addition the gap in product quality continues to narrow against the more established brands. This is most notable in the consumer electronics industry. Domestic demand in Asia remains resilient, supported by increasing affluence (real wage growth is typically faster than real GDP growth in Asia), low debt levels and high savings rates. All of which are likely to support multi-year growth.

Martha Wang – portfolio manager Fidelity China Fund

2011 is going to be an interesting year for China as it continues to pursue structural reform to ensure economic growth. The focus will continue to be quality of growth versus quantity.  As outlined in the preliminary twelfth five-year plan, Chinese government’s development plans are expected to centre around pro-consumption policy to continuously stimulate domestic consumption. In terms of pro consumption policies, the public spending on healthcare and social security are expected to rise. RMB appreciation and wage growth will continue to be growth catalysts, boosting domestic demand and household income.

Teera Chanpongsang – portfolio manager Fidelity India Fund

India is expected to continue to generate strong real GDP growth, driven by underlying structural growth trends such as a large labour force, growing domestic consumption and increased infrastructure spending.  These provide compelling investment opportunities and should lead to strong earnings growth in the coming years. Growing income levels in a fast growing population, together with high savings rate and low debt levels should continue to support consumption, which in turn would create more investment opportunities. Local manufacturing firms are also working close to their full capacity, which suggests that more greenfield and brownfield expansions will happen, once again creating investment opportunities.

Robert Rowland – portfolio manager Japanese equities

I maintain a cautious outlook for Japan. The country’s economy is set to slow as global growth momentum wanes, output gaps persist, capex growth remains weak and wage deflation continues. While downside risks to the economy have undoubtedly increased and deflation remains entrenched, Japan’s proximity to high-growth Asian economies such as China should provide a measure of support to exporting companies.  Furthermore, the government is in the process of formulating additional support measures and the Bank of Japan has eased monetary policy further by effectively cutting its policy rate to zero and increasing asset purchases. Meanwhile valuations of Japanese stocks remain supportive, with both asset- and earnings-based metrics at the lower end of historical ranges. I believe that the downside of the market is limited, but the market has few upside catalysts.

OVERSEAS EQUITIES

Adrian Brass – portfolio manager US equities

I expect the US economy to continue to recover from the depressed levels of last year, due to stabilisation of the major structural overhangs, such as the financial system, housing and unemployment. While, in the short-term, unprecedented levels of stimulus from quantitative easing programmes are driving asset prices higher over the longer term I remain concerned by the levels of government and consumer indebtedness and the possibility of rising taxes. However, the US is a broad market in which I am able to find plenty of attractively valued investment opportunities.

Alexander Scurlock – portfolio manager European equities

I continue to be positive on European equities, since I think market valuations are favourable, especially versus government bonds.  In particular, I continue to believe the core areas of Europe are most attractive.  In particular, Germany is the prime beneficiary of stronger growth in emerging markets and a ‘one-size-fits-all’ ECB policy. Fiscal austerity in southern and peripheral European states, however, reinforces my conviction that overall European economic growth will be sluggish, as rising taxes and cuts in spending curtail business activity. My focus is on finding sustainable growth opportunities within this challenging economic environment. The key to this is pricing power. Companies that have pricing power will attract a premium in an environment of low inflation and low economic growth.

Nick Price – portfolio manager emerging market equities

The secular drivers of emerging markets remains intact: attractive demographics, competitive advantages from low labour costs, an abundance of natural resources, increasing prosperity, productivity gains and sound fiscal management. At this stage, I do not yet subscribe to the idea of an emerging market bubble.  I continue to find attractive opportunities at reasonable valuations. Regardless of any near term volatility in equity markets, I remain extremely positive over the long term.

The post Investment Outlook for 2011 from Fidelity’s portfolio managers around the globe appeared first on AdviserVoice.

Against this backdrop, the Australian equity market remains attractively valued. The overall market is trading on a price earnings ratio of around 12.7 times. This compares to an historical average ratio of closer to 14 times. As the chart below illustrates, the performance of the Australian equity market is highly correlated with earnings growth. In 2010 this relationship diverged, with the market lagging the improvement in earnings. This suggests some catch up is due in 2011, particularly given our expectation of continued solid earnings growth in Australia.

In terms of stocks, we continue to see value in cyclical sectors given the potential for an improvement in global growth next year, particularly if the US economy improves. Many cyclical companies are trading on modest multiples and earnings levels are lower than they should be on a long term view. Examples of the cyclical stocks that we favour include BlueScope Steel, Brambles, Billabong and News Corporation. These companies are particularly leveraged to an improvement in the US economy.

Whilst we have taken profit on some resource positions, selected stocks in this sector remain attractive given their leverage to stronger commodity prices and Chinese industrialisation. We particularly like BHP as it has significantly lagged its peers in the recent rally. BHP is trading around nine times next year’s earnings whilst many of the smaller, one commodity stocks are trading on 12 to 15 times.

The other sector of the market that could do well in 2011 is the banks. Much of the negative news that plagued this sector in 2010 is fully price in to current share prices and recent developments suggest regulatory risks may be abating.

The above information is of a general nature and has been prepared without taking account of your individual investment objectives, financial situation or particular investment needs. It is not intended as financial advice to retail clients. Before making an investment decision, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. We recommend you consult with your financial adviser, who can help you determine how best to achieve your financial goals and whether investing in a fund is appropriate for you.

Global markets

Equities advanced for a second consecutive week as Barack Obama agreed to extend Bush-era tax cuts, which are widely expected to boost US growth, and the S&P 500 closed up 1.2% at 1,240 – a level last seen in September 2008. However, the cost of this fiscal stimulus, which is likely to run to trillions of dollars in years to come, caused a sustained sell off of US and other ‘core’ government bonds: with the yield on US ten-year bonds, or treasuries, spiking as high as 3.33% midweek.

Macroeconomic data also supported equities. UK industrial output rose 5.8% in the year to October, Japanese growth statistics were revised upwards, and the Nikkei 225 surged to a seven-month high. China’s November exports increased 35% over a year ago – but this and stubbornly rising prices are stocking expectations that the government will tighten the money supply by raising interest rates before the end of the year.

Higher US bond yields generally support the greenback, and the US dollar rose 1.5% against the yen and the euro. Silver, increasingly seen as an inflation-hedge by investors, hit an all time high of over $30 an ounce – while gold, copper and oil also remained in demand, before falling back slightly from cyclical peaks seen midweek.

Global equities

The FTSE 100 rose 1.2%, driven in part by the prospect of acquisition activity. Smith & Nephew spiked over nine per cent on conjecture that private equity outfits are eyeing the artificial-joint maker. Anglo-Danish security firm G4S rose on similar speculation, while shares in Cobham – which have fallen 20% this year – rebounded on rumours that US defence conglomerate Northrop Grumman is considering a bid. Burberry rose 6.5% on talk of a Far Eastern bid for the luxury goods retailer. Meanwhile, FTSE 250 stalwart De La Rue surged 25% as it emerged French rival Oberthur Technologies had twice
offered to buy the 200-year old bank-note printer in the last two months.

The US Treasury, which has spent $45bn shoring up Citibank, sold its remaining shares in the country’s third largest lender at an estimated $12bn profit – it is now looking to accelerate the disposal of its holding in insurance giant AIG. Diageo, formerly known as Guinness, emerged as a possible bidder for US consumer products specialist Fortune Brands’ drinks portfolio, including Jim Beam and Courvoisier brandy.
European carmakers BMW and Volkswagen rose strongly on the back of well-received Chinese economic data – both are major exporters to the country – while privately held Swiss-based commodity trading giant Glencore is apparently mulling a $31bn London listing.

Global bonds

US government bonds prices plummeted midweek on concern that renewing the previous Administration’s tax breaks will result in higher levels of borrowing. Although prices rebounded on a well-received auction of 30-year securities, the closing yield of 3.30% on ten-year debt was 30 basis points up on the week, and nearly one per cent higher than mid-October. Despite positively interpreted economic data, UK ten-year government bonds yields were higher at 3.52 as against 3.40% a week ago – nonetheless, the differential between UK and US borrowing costs has narrowed to a low of around 20 basis points – a spread
of 50 basis points has been typical of recent months. German government bond yields rose by 12 basis points to 2.97%, having at one stage breached three per cent. Less in the news, Japanese ten-year yields are also sharply up – and at 1.20% are around 25% higher than a month ago.

It was a mixed week for peripherals. A meeting of EU finance ministers could not agree measures – such as a European-wide sovereign bond, or ‘E-bond’ – to contain the crisis in weaker members’ finances – a failure widely blamed on German government intransigence – and Spanish and Portuguese yields moved up around 20 basis points in thin trading. The Irish parliament narrowly approved the government’s austerity budget – and Irish bond yields dipped slightly on Friday, shrugging off a two-notch downgrade from ratings agency Fitch.

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