Over the last six months there has been a subtle but very encouraging change in investor sentiment. Despite the best efforts of the media to portray a doomsday scenario for equity markets, attractive valuations, dividend yields and positive corporate news flow have become increasingly common features of the investment landscape and there is evidence that this has been recognised by the investment community. This is a significant milestone. We think that the only (albeit significant) stumbling block, and the sole reason investors remain sceptical about equity markets, is the ongoing uncertainty about the Euro zone. So, whilst we detect the gradual re-emergence of a preference for equities, confidence levels remain subdued.
The problems in Europe are serious and there are no immediate solutions but we don’t believe there will be a major catastrophe: we think the Euro zone will simply stagger on in its current form. Fiscal policy may stoke investor sentiment in the short term but we believe economic weakness is likely to pose a threat to any sustained rally in Continental European equity markets. We therefore think valuations will remain at historically attractive levels for the foreseeable future and as a result we have very little money invested in the region.
Concerns about Europe are weighing on stock markets globally. Unsurprisingly therefore, the more defensive sectors have outperformed but we believe that there are some exciting investment opportunities in those sectors which have been overlooked. Smaller companies have been avoided due to fears about liquidity and investors have been sceptical of the ability of growth companies to fulfil their ambitions in the current economic climate but there are plenty of opportunities for investors who are prepared to take a long term view.
Indeed, some of the best performing companies recently have been the high growth, global businesses listed in the UK and US. These companies have benefited from their listing on Western stock markets at a time when institutions have been repatriating money previously invested in the emerging markets.
The US market itself has performed strongly in relative terms led by the recovery in the much maligned housing sector. A low inventory level of new homes in relation to rising demand has pushed up house prices, giving a much needed boost to the sector and related businesses such as plumbing and paint merchants. Further more, we think there will be additional monetary stimulus from the Federal Reserve which should be a catalyst for the housing sector and other operationally geared areas of the US stock market.
We are also hoping for some additional monetary easing from the Chinese Government. China fell out of favour with investors when the Government revised down its annual GDP growth expectations. We believe the slow down in 2011 was primarily self inflicted and not simply a direct consequence of events in Europe and, as such, can in large part be corrected by domestic policy. The Chinese Government has indicated its willingness to protect growth both in its rhetoric and its actions. It is proactive and supported by vast sums of liquidity, two factors which should not be overlooked and which we think will aid the country in exceeding investors’ expectations for growth.
India’s stock market has started to stage a come back spurred on by attractive valuations. We believe the long term story is compelling and that, in the short term, there is an opportunity for an upward re-rating of the stock market and a renewed appetite for Indian equities if the government can recover from its current state of political paralysis. However, we are not increasing our exposure at the current time. The other country we favour in the long term but which has disappointed recently is Brazil. Investors appear interested solely in Brazilian commodities but we are more interested in the consumer story there and remain excited by the opportunities we see.
The message we would like to leave you with is that the investment community has regained its perspective. After a prolonged period of macro economic disappointment the recognition of the value in equity markets is important. Clearly the uncertain economic and political landscape in Europe means fixed income investments still hold some attraction but on valuation grounds there is no doubt that equities offer a better long term investment proposition. The US central bank recently reported that during the first quarter of this year retail investors bought more Treasurys than the Federal Reserve and foreign investors combined. This is a telling statistic and one that we believe signals that we are near the top of the fixed income market and, conversely, the bottom of the equity market. We have an abundance of investment ideas and believe the next six months will yield some great investment opportunities.