Where the smart money in­vests

There are nu­mer­ous rea­sons to be bullish on Euro­pean stocks.

Finweek English Edition - - COVER STORY OFFSHORE INVESTING -

there are many rea­sons to in­vest off­shore, and the cur­rent level of the rand of­fers a “fan­tas­tic op­por­tu­nity” to take money out of the coun­try, says Ryan Fried­man, head of In­vestec’s multi-man­ager busi­ness in South Africa. His rea­sons are three­fold: in­vest­ing off­shore pro­vides a hedge against a highly volatile emerg­ing-mar­ket cur­rency; it al­lows in­vestors to di­ver­sify as­sets into un­cor­re­lated mar­kets abroad; and pro­vides in­vestors with a much greater se­lec­tion of as­sets to in­vest in.

In­vestec’s multi-man­ager busi­ness, which has $1.6bn in­vested in global multi-man­ager funds and in­vests across a range of eq­ui­ties, fixed in­come, prop­erty and hedge fund in­stru­ments, is cur­rently par­tic­u­larly bullish on Europe. Eco­nomic data out of Europe is look­ing much bet­ter, with first-quar­ter GDP growth of 1.7%, ex­ceed­ing the 0.7% achieved by the US.

The bank­ing sys­tem has also sta­bilised and looks a lot health­ier; val­u­a­tions in Europe are about 20% cheaper than in the US; and Euro­pean com­pa­nies have been re­port­ing strong earn­ings growth, he says. “That’s go­ing to pro­vide im­pe­tus for share prices to run and hope­fully close the gap be­tween the val­u­a­tions of US and Euro­pean com­pa­nies.”

Richard Cardo, lead SA port­fo­lio man­ager of In­vestec’s Global Lead­ers Port­fo­lio, which in­vests in global com­pa­nies that are listed in the US, UK and Europe, is also bullish on the re­gion. The port­fo­lio cur­rently holds 36 stocks, with about 23% of the port­fo­lio ex­posed to the tech­nol­ogy sec­tor. “We like the pos­i­tive cycli­cal and sec­u­lar growth trends [in tech­nol­ogy], par­tic­u­larly around new ar­eas of growth such as the move to the cloud, mo­bile data, the In­ter­net of Things, evo­lu­tion of dig­i­tal pay­ments, ar­ti­fi­cial in­tel­li­gence, etc.,” says Cardo. It holds stakes in Al­pha­bet, Ama­zon, Cisco Sys­tems and Face­book, and re­mains well ex­posed to the emerg­ing­mar­ket con­sump­tion growth story, with about 23% of the port­fo­lio in­vested in com­pa­nies like Col­gate-Pal­mo­live, John­son & John­son, Di­a­geo, Unilever and LVMH. The port­fo­lio has been in­creas­ing its ex­po­sure to select Euro­pean stocks, Cardo says. Re­cent pur­chases in­clude in­dus­trial group At­las CopCo and health­care and agri­cul­tural group Bayer. “Of the de­fen­sive sec­tors, we pre­fer health­care and phar­ma­ceu­ti­cals the most – these are less sen­si­tive to in­ter­est rate hikes, have su­pe­rior earn­ings growth and more at­trac­tive val­u­a­tions, and tech­no­log­i­cal and in­no­va­tion ad­vances pro­vide long-term growth op­por­tu­ni­ties.”

With global growth align­ing for the first time since the global fi­nan­cial cri­sis, Fried­man says cycli­cal sec­tors of the mar­ket are set to do well. “Ma­te­ri­als re­main quite cheap; en­ergy has been beaten up a lot re­cently and looks quite in­ter­est­ing.”

The fi­nan­cial sec­tor (less cycli­cal than ma­te­ri­als), for ex­am­ple, is also worth a look. “Fi­nan­cials got sold off ag­gres­sively af­ter the global fi­nan­cial cri­sis”, partly as a re­sult of huge fines and more oner­ous reg­u­la­tion.

“We think the reg­u­la­tory bur­den is go­ing to ease, plus you’ve got net in­ter­est mar­gins pick­ing up, and some of the banks are trad­ing at very cheap mul­ti­ples rel­a­tive to other sec­tors. In an en­vi­ron­ment where bet­ter eco­nomic growth can lead to a pick-up in credit ex­ten­sion and where yield curves are steep­en­ing, we think it will be ben­e­fi­cial for the banks.

“We like Euro­pean banks specif­i­cally, and we think that’s an in­ter­est­ing trade fol­low­ing their re­cent sell-off.” editorial@fin­week.co.za Head of In­vestec’s mul­ti­man­ager busi­ness in SA

Ryan Fried­man

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