“If you look on the face of equity and bond valuations, you can get pretty depressed,” admitted McPherson. But “scratch beneath the surface, and there are some really good opportunities out there. Investors just have to be more selective,” he said.
One area the team is particularly drawn to is Japanese equities because of the current and projected earnings growth story. And compared with other markets, the forecast for Japanese earnings actually appears accurate, he noted.
“US stocks are expensive,” he added. “They only look half decent value if you buy into analysts’ earnings forecasts. If you do, the return you are signing up to is a return of 3-4% for the next five years, which also comes with a lot of risk. That’s nothing to get too excited about.”
Valuations for UK and European equities also look deceptive to McPherson because they downplay the very real currency and ongoing political risks.
Meanwhile the relatively more “contrarian” Japanese equity market offers extremely good value, in McPherson’s view.
He said: “The valuations and metrics are telling us that you can make as much as 40-50% over the next five years in that market. Japanese profit margins are low but moving upwards. Whereas in the US, they are just moving down.”
Add to that, an accommodative central bank, nearly £2tn of cash sitting on company balance sheets and a shifting emphasis toward shareholders and you have a much more compelling investment story, he added.
The Psigma team finds the case for investing in certain EM consumer stocks equally persuasive. Despite the potential headwind from a stronger dollar, something which has other investors rattled, the group is moments away from adding the Macquarie Asian All Stars fund to the portfolio.
The Macquarie vehicle hones in on tourism and consumer trends in the maturing Chinese market, explained senior investment analyst Daniel Adams, which Psigma is keen to tap into over 2017.
Finally, inflation protection, particularly in the US, is “the name of the game” across Psigma’s portfolios currently, according to McPherson.
The economic policies that President-elect Trump has publicised and tweeted about during and since his campaign run, or ‘Trumponomics’, has “put the US recovery on steroids,” he said. However, there are opportunities within the higher inflationary environment.
“Therefore, inflation will come back so assets that tap into the economy, like high yield credit, are going to do well, as are assets that tap into inflation like banks.” Playing off of this theme, the team are invested in the Airlie Strategic Focus High Yield fund.
