This was the view of the members of the panel discussing ex-UK equity opportunities at PA Congress UK 2014.
Click here for a behind the scenes gallery of this year's event.
According to Robert Horrocks, CIO at Matthews Asia, there is a big split at the moment in the world between those economies that are focusing on boosting the demand side of their respective economies (countries like the US and the members of the EU) and those, like China, Japan and India, that are attempting to reform the supply side.
On the demand booster side, Horrocks says, economies are using fiscal and monetary policy to boost short term demand in a bid to stave off the threat of deflation because they see themselves as operating below their potential.
On the other side, China, India and Japan have all, in the last 12 months, elected supply-side reform governments.
This Horrocks says, bodes well for Asian equity investors because, the view implicit in a focus on reforming the supply-side is that deflation is not a problem. And, he says, given where the levels of investment and saving are in the region, inflation is unlikely to be a problem.
He added: “When you think of dividend growth, a mildly inflationary reformist kind of backdrop is normally pretty good for equities and for a dividend strategy point of view, in general.”
Dan Roberts, manager of the Fidelity Global Dividend Fund, agrees that there are a number of very good companies in which to invest in Japan.
While preferring bottom up stock picking to a top-down approach, Roberts pointed out that, at an aggregate level, Europe is looking like one of the world’s more attractive geographies, while the US is looking pretty expensive.
But, he wa quick to caution that such an analysis hides a large dispersion of valuations, particularly in the US.
“Just take IT for example, you have the so-called ‘sexy’ tech stocks like Facebook trading at 16x revenues and the sexy tech of yesteryear, like Microsoft trading at 14x earnings, so huge valuation dispersion and that is just within one sector. That is appealing.”
Turning the panel’s attention to Europe, Barry Norris, CIO at Argonaut, explained that for the past few years the winning trade for European equity investors has been to invest only in high quality, internationally diversified companies and avoid companies with specific exposure to Europe.
“We think this trade will prove spectacularly unsuccessful over the next few years, simply because all the potential now in European equities lies in the fact that profit margins among corporates in the periphery are unsustainably low,” he said.
He added: “These companies have been forced to cut costs and many of their competitors have gone bust. Those that remain are seeing sales recovering with the economy; the operating leverage to that is going to be fantastic in terms of the level of profit growth over the next few years.”
According to Norris, one of the important things to remember in Europe is not to think that some countries are fundamentally doomed, while others are going to do fantastically well.
“Thinking back to the start of the euro, Germany was the sick man of Europe,” he pointed out.
Miles Geldard, head of fixed interest and multi-asset absolute return at Jupiter agreed that many of the companies in the European periphery have unsustainably low profit margins at present.
He said: “I think the sweet spot for any economy for profits is when it goes from recession to recovery because companies go from basically losing money or earning very little money to earning a lot of money after having cut costs. It is only later on when you have had a number of years of growth.”
Asked about the impact of quantitative easing, Norris pointed out that from an equity investor’s point of view, the important thing to note is that if it has caused a bubble it has done so in the valuation of so-called dead weight assets, i.e. assets where you’ve fixed your coupon return.
“If QE is really not needed anymore, it’s because economies are sustainably growing again. If economies are sustainably growing again, corporate profits are growing again. We’ve very much seen a re-rating over the last three years as the tail risk of the Euro breaking up has diminished.”
But, he added: “I think, to get back into a proper bull market, we need profits growing and therefore if QE is being withdrawn for the right reasons, yes, it will bring down valuations amongst deadweight assets, but for live-weight assets like equities, it’ll be frankly irrelevant because the earnings will be growing and offsetting that.”
