Global forecast: where to invest
Acadian Asset Management Winner of Money Management’s Fund Manager of the Year Awards emerging markets category.
We are positive on almost all markets in Europe. This is because inflation remains controlled and Europe’s major economies have shown encouraging signs of continued, if moderate, growth. Corporate profitability is improving and valuations are reasonable.
Norway and other Scandinavian markets top our forecasts with attractive valuations and strong earnings trends. The UK is the strongest of the larger European markets due to the same reasons, particularly in energy, banking and materials.
We continue to view Japan negatively over the short-term. Relative valuations are higher than many alternative markets and we see the potential for underperformance from stocks across many sectors. Economic fundamentals for this market, including domestic demand and consumer sentiment, are quite positive and point to a sustained recovery.
As such, our longer-term outlook is positive and we continue to view Japan as a market where individual stock selection can produce excellent results, but the overall market has the potential to underperform the world equity markets over the short-term.
Our current forecast for the US is relatively neutral to slightly positive. Although consumer confidence has demonstrated resilience, corporate profits have remained strong and unemployment is trending low, the growth picture for the US is expected to moderate for the second half of 2006. Valuations appear comparatively high and inflation concerns have spiked in recent weeks.
Venezuela is the top-ranked market in our framework based on relative valuations, cash flow factors and its relationship to commodity prices.
Turkey and Russia are the top-forecasted EMEA [European, Middle East and African] markets in our framework. Turkey is showing attractive valuations and a favourable monetary policy, while in Russia the market’s sensitivity to oil prices has contributed significantly to our forecast.
In Asia, China’s forecast is moderately positive, with factors such as recent underperformance (priming it for positive reversion) and strong earnings growth offset by higher than average market volatility and less favourable monetary conditions.
However, as one of the larger and more diverse emerging markets, China’s individual stocks offer a quite wide spread of valuations and forecasts, making it possible to construct a group of Chinese stocks that is far more attractive than the market as a whole.
Rick Barry is senior vice-president and managing director of Acadian in Singapore
Lazard Asset Management
Finalist in Money Management’s Fund Manager of the Year Awards emerging markets category.
Where are emerging markets equities going?
We are somewhat cautious in the shorter to medium-term (within the next 12 months), and would not be surprised if emerging markets experienced additional weakness in the face of sharp recent strength in the asset class.
However, we are more positive over the medium-term (approximately the next 12 or more months) and long-term for a number of reasons.
Factors we believe are supportive of emerging markets equities, in the medium and long-term, include: significant growth in dedicated capital; the luxury of more-flexible exchange rates; the decreased volatility of the asset class, which has retreated to less than 20 per cent standard deviation from 40 per cent in 1998; reasonable valuations; superior financial productivity compared to developed markets equities; improved transparency; and the continuing emergence of world class emerging markets companies.
Historically, emerging-markets equities have performed poorly during periods of tightening monetary policy in the US and globally. A hard landing for the US economy would be a negative factor for the asset class. Rising commodity prices, trade friction, and geopolitical events could also adversely affect the asset class.
The outcome of China’s massive industrial revolution remains a wildcard for emerging-markets equity investing.
If the outcome for China is positive, there is the potential for a longer, but possibly more volatile, bull market in emerging-markets equities.
Robert Prugue is a senior managing director and senior executive of Lazard
Aberdeen AssetManagement
Finalist in Money Management’s Fund Manager of the Year Awards emerging markets category.
While there has been recent volatility in world markets, Aberdeen strongly believes the long-term investment case for international equities, including emerging markets, remains undiminished.
The long-term investment case for emerging markets remains compelling.
The recent uncertainty has focused largely on inflation fears in the US and the potential that the Federal Reserve may continue its tightening policy, thereby reducing the availability of cheap credit.
Fears of an economic slowdown have begun to gather pace and if US earnings come under pressure, rising input costs are increasingly likely to be reflected in checkout prices and, hence, inflation figures.
We remain cautiously optimistic for international equity markets in the short-term, and support a long-term strategic overweighting to emerging markets.
Local returns have recently been dominated by the resource sector, which has benefited from high commodity prices. In part, speculators rather than actual demand from users have fuelled this rise in the price of commodities, and we are likely to see further volatility in prices over the short-term, as some of these positions are unwound.
Stuart James is an associate director of business development at Aberdeen
Walter Scott and Partners
Finalist in Money Management’s Fund Manager of the Year Awards international shares category.
Since its inception in March 2005, the Walter Scott Global Equity Fund has benefited from its two largest overweight positions, Japan and the energy sector. Walter Scott and Partners continues to see opportunity in these areas.
Japan continues on its own growth trajectory, as the highly indebted US market finds itself amid interest rate uncertainty, and European markets continue to run ahead of any fundamental improvement at the macro level.
Japan’s recent economic data provided further confirmation that growth is continuing and confidence remains high.
The energy sector has recently seen dramatic price increases, but the underlying fundamentals have not changed significantly. Consumption is growing rapidly and set to increase. Last year, Asia consumed more oil than North America for the first time.
On the supply side, it is harder and more expensive than ever to get oil out of the ground. The cost of production, including exploration, is now estimated at over US$40/barrel.
This suggests that oil prices could remain higher than much of the market currently expects, leading to additional upside to current share prices.
Walter Scott expects US economic growth to slow, and we therefore remain cautious about corporate margin pressure and valuation.
Roy Leckie is investment manager at Walter Scott and Partners
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