By Edward Bonham Carter, CIO of Jupiter Asset Management and manager of the Jupiter Undervalued Asse...
By Edward Bonham Carter, CIO of Jupiter Asset Management and manager of the Jupiter Undervalued Assets
That an economic and financial hangover still hurts after three years gives some indication of what a swell tech party that was. Not only was the punchbowl not removed but, in a Y2K liquidity surge, it was topped up with 100% proof Old Alan.
During the millennial period, it was excess investment funded by 'free' money that led to an excess of supply. Such overcapacity was typified by too many new businesses all assuming 100% market share. That's the trouble with free booze, it engenders foolish behaviour.
Three years later, we remain in a world of low numbers, both nominal and real. Why?
Not only is there excess supply but demand is hindered by large debts. Once encouraged to gear up, companies now prefer to pay down debt rather than reinvest.
Consumers also took on more debt, enticed by the affordability of servicing costs. But with no inflation to whittle down their original loans, future spending decisions must, at best, become circumspect, while unemployment would make any interest payments difficult to afford.
While we do not think outright deflation will be a problem for most Western, services-based economies, Germany could prove to be the exception. Switzerland already has deflation.
Not only is there a surfeit of supply and a dearth of demand but the ferocity of global competition severely limits the ability of companies to raise prices and squeezes corporate profitability. Therefore, growth will remain low. Nevertheless, the question remains: Where is economic growth to be found in the world?
China, with its considerable production capacity, is becoming increasingly important, not just as an exporter of deflation but also as a source of growth, fuelled by record levels of FDI. China's share of trade with the US is now on a par with that of Japan.
Growth will also be found in emerging markets and Eastern Europe, although it will be more volatile. Perhaps those commodity price rises were not simply a reaction to war and fears of inflation?
In such an environment, it is best to avoid indebted companies with low-quality businesses. These will be squeezed.
The corollary is to seek out businesses that are highly cash-generative as this gives them wider choices, such as to reinvest or return money to shareholders and to invest in genuine growth businesses, although these will be in short supply. Such a strategy ought to be a good way for investors to make both relative and absolute returns.
Since last summer, the Jupiter Undervalued Assets fund has increased its weighting in blue chips to more than 40% as these came to offer greater value, while positions in War Loan and Treasury strips have been reduced. At the end of May, some 10% of the fund was in cash. Rather than an asset allocation call, this stems from a desire to remain nimble.
There are plenty of opportunities to make money. Active managers should not be afraid of volatility as it provides greater chances to buy and sell. However, sometimes the hardest thing is to do nothing. Studied, conscious inactivity is an underrated virtue in portfolio management.
Seek cash-generative and growth companies.
Volatility offers opportunities.
Attractive valuations are available.
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