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Five investment trends to bank on

12 September 2008 Gareth Stokes

One of the highlights at a recent Nedgroup Investments road show was a presentation by Sarasin & Partners’ chief executive, Guy Monson. Sarasin runs the Nedgroup Investments’ Global Balanced Fund. The presentation covered a range of interesting topics, fo

Investing is about getting the trends right

Monson says his firm is concentrating on five important trends at the moment. The first is to identify companies with superior pricing power. These are typically companies that have scarce products and services which enable them to ‘name’ their price. You should be considering companies that supply energy equipment, those involved in specialised infrastructure projects, ports and transport. A great example is companies involved in the supply of turbines and boilers for power stations as global demand rockets.

The second trend is toward companies with long-term patent protection and intellectual property. Pharmaceutical firms are the obvious pick in this category and Monson says their funds carry a heavier weighting to this sector than at any time in the last 20-years. You need only look at the recent price performance of locally listed pharmaceutical and generic drug manufacturer, Aspen Pharmacare (JSE: APN), to appreciate this trend. The company is one of only a handful of JSE-listed firms trading near all time highs at the moment.

Trend number three is to identify sectors where companies enjoy security of supply. Look for businesses that are involved in water, agriculture, energy and transport. Investment choices in these areas are often limited in emerging markets where many entities are state controlled. Think Eskom (energy), Transnet (transportation) and the Rand Water Board (water). The fourth trend has all of us on the edge of our seats. We’re waiting for the interest rate cycle to turn so that we can dive in to the financial sector. Monson says a recovery in the financial sector is inevitable; but timing will be crucial! And finally, number five, is to consider the trend to global convergence. Huge profits wait for those companies that can accommodate the emerging world’s demand for Western goods and services.

Getting the mix right

Sarasin’s “stock selection is entirely thematic,” says Monson. But that doesn’t mean economic factors take a back seat. At the moment there are some interesting developments that guide stock selection. Oil, food and commodity prices have been on the decline for the last month or two, slightly reducing global inflationary pressures. At the same time the US dollar has finally shown some fight, bouncing from record lows against the pound and Euro. According to Monson “the dollar rally is for real and the outlook for an accelerated recovery in the US is warranted.” Monson says that the markets currently reflect “one of the most extraordinary valuation anomalies” that he’s seen in more than two decades in world markets. He believes that equities are undervalued against bonds by as much as 60%. That’s why 62% of the funds’ capital is tied up in global large-cap equities at the moment. Of these, 42% are located in North America where the latest resurgence of US exporters has led to huge growth in that sector.

The ‘underweight’ segment in Sarasin’s portfolio is emerging markets. Less than 2% of funds remain in those markets after a decision was taken to exit those markets in September last year. Although the move might have been a bit early there are certainly few regrets today as shares in China and India continue to fall. Monson says there will be a “tremendous opportunity to buy back into emerging markets in the middle of 2009…” Interest in the region will be rekindled when certain Chinese and Indian blue chip shares get added to the World Index.

Undoing the sub-prime bungle

Will the US weather the current credit crisis? And how will we know when the economic giant’s recovery is complete? Monson says the United States has already taken the first steps on the road to financial recovery. We’ve seen aggressive monetary policy intervention as Ben Bernancke aggressively cut rates into the crisis. Monson reveals that the US Federal Reserve burned through a third of its balance sheet over a four week period in an attempt to bolster ailing US lending institutions. Freddie Mac and Fannie Mae which together account for around $5.7trn in mortgage loans, have for all intents and purposes been nationalised and promised more than $100bn each over the next two years.

And the US dollar is being nursed back to health. South Africa and other resource rich emerging economies are already feeling the backlash as commodity prices reverse on dollar strength. Monson believes the recovery will be complete once stability returns to US property prices… He’s quick to add that the level of this price stability is not as important as assessing the correct the amount of collateral that underpins the US mortgage market. Under these circumstances investors should definitely be looking at bolstering their international exposure.

Editor’s thoughts: With commodity prices in strong retreat the resource heavy JSE has taken a pounding of late. Fund managers and investors alike are pulling their hair out trying to determine the best sector to remain invested in. Financials look cheap but might only recover next year, retailers are in the same boat and industrials are struggling in the high inflation environment too. Is now the time to look offshore or would you rather ride out the market uncertainty in ‘safe’ cash investments? Add your comments below, or send them to gareth@fanews.co.za

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