FYI | Apr 17 2008
By Chris Shaw
Daily fluctuations may not reflect the view global equities are good value at present but Credit Suisse head of Global Economics and Strategy Group (GESG) Giles Keating suggests this is indeed the case. Keating has come up with 10 investment themes investors should keep in mind when searching for the best returns in the months ahead.
The first theme is what Keating classes as frontier markets, which means looking beyond the markets in developed and emerging economies to those in places such as Africa, Pakistan and some smaller Asian and South American markets. While these markets are likely to be naturally more volatile given their less developed nature the GESG view is the long-term potential is very good, meaning the potential for excess returns is also good.
Theme two is a currency-based one, with the group taking the view 2008 may be a year where Asian currencies demonstrate their strength on the back of solid economic growth and the inflationary impact of rising food costs. As well Keating points out the actions of the Chinese to allow their currency to rise relative to the US dollar is likely to act as something of a benchmark that other nations in the region may follow.
The US presidential elections are the key for theme three, Keating noting election years (the first quarter of this year notwithstanding) are generally good ones for the stockmarket. There are some specific factors to pay attention to as well, Keating pointing out Democrats tend to be better for generic drug manufacturers while Republicans are better for big pharma.
Investors looking for gains on falling interest rates may look to Europe as Keating points out inflation-linked bonds do well when real interest rates are going down. That was a 2007 story in the US and he expects it will turn out to be a 2008 story for the Euro zone as signs of slowing growth should see the European Central Bank cut rates at some time during the year.
Chinese brand names is another theme worth investigating in Keating’s view as there is significant potential if Chinese consumption increases from 5-6% of the global total to 20% or more, with home grown brands expected to be an obvious beneficiary if this plays out as expected.
Climate change is also seen as a key ongoing investment theme and this implies potential gains from stocks related to alternative energy and water as examples. Again 2007 was a good year for following such a strategy and Keating expects 2008 to deliver similar solid performance.
Commodities are also expected to remain a focal point for investors, Keating taking the view the super cycle remains in place and this will continue to push prices above current levels. Selectivity will be important though as in the shorter-term oil and some base metals may come under pressure while precious metals possibly run further, meaning investors must remain aware of market factors when dealing in the sector.
Socially responsible investing or charity is also likely to be a theme again this year, following on from last year’s stories of the likes of Bill Gates and Warren Buffett declaring much of their wealth would be donated to charities in the future. This is of little help in terms of generating investment returns but Keating notes there are related themes such as the growth in micro-financing and companies aiming to make money by focusing on selling low cost products to low income buyers in mass markets.
An easier theme for investors to take advantage of is investing in what Keating classes as cheap, distressed assets, which in the current environment may span anything from real estate to banks and certain kinds of debt. His view is in some cases valuations will be at or near distressed levels, meaning prices have more than fully discounted any or most potential problems. While there is an element of bottom fishing to such an approach Keating points out those who wait too long may find valuations turn around much faster than expected.
Those with fixed interest investments should focus on quality and shorter-term maturities in Keating’s final theme, as longer-dated yields have fallen a lot and so now are more likely to rise, bringing down the value of those bonds. Issuer quality is also a key as yields on less secure bonds may be impacted as the global economy continues to slow down.
