The issue is an old one: baskets and eggs. For now, funds flows are in favour of the US. But if the ...
The issue is an old one: baskets and eggs. For now, funds flows are in favour of the US. But if the euro strengthens sufficiently, or if a recovery in Japan begins to look more likely, money will begin to flow in the other direction. And while the popularity of the US market is clear, the situation becomes more complex by the day.
Or are markets so closely correlated that asset allocation now makes no difference? Japan is the market that has the least correlation with the US. But in 2000, Japan's stock market fell by 26%. Diversifying into Tokyo would not have improved the returns for the year for most investors.
Despite having a poor overall result, Japan offered some good value investments last year. The share price of Mitsubishi Heavy, a provider of transport equipment, nearly doubled in 2000. The change of management in this domestic Japanese company allowed it to become more shareholder friendly. Its diversified product base, leading market share in many areas of its operation and stable earnings make it an obvious choice for a global portfolio.
Latin American markets were at the lower end of the annual returns league table in 2000. But that does not mean that investors should avoid the region. Although investors can access some South American companies through the US market, there are often better deals to be had locally.
We are keeping our European weighting below the median in order to finance an overweight position in Japan. We have switched assets from the US and Japan to increase our emerging markets exposure.
As for sector allocation, our bias is towards growth and interest rate sensitive stocks because we regard defensive stocks, US healthcare in particular, as overvalued. We regard our energy holdings as a source of cash and have been selling down our holdings into spikes in the sector.
Overall, technology is still our preferred area in sectoral terms. Opportunities remain selective, but we do think that the selling has been overdone. A further rally is overdue, and 3,500 on Nasdaq is far from fanciful. We have reduced what we own in cheaper, slower-growing companies like Computer Associates, NTT and NTT DoCoMo. And as their prices now reflect compelling opportunities, we have bought faster-growing companies with excellent prospects Xilinx, ASM Lithography, Keynote Systems and MicroStrategy.
Turning to currencies, even though the euro is undervalued a stronger euro is not necessarily positive for European companies. The yen may come under pressure while president Bush reigns supreme, but lower levels would certainly not concern the Bank of Japan. It remains our view that the dollar will stay a relatively firm currency. Sterling should decline at a gradual rate, particularly against the euro.
James Fairweather is chief investment officer at Martin Currie
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