Legal & General is looking to overweight the Asian region, believing it offers higher growth at lowe...
Legal & General is looking to overweight the Asian region, believing it offers higher growth at lower cost than Europe, US and UK.
David Rough, group director of investments at Legal & General, said he was looking to take advantage of the fact that P/Es have fallen to low levels following the Asian economic turmoil. He forsees earnings growth increasing amidst a pick up in Asian exports, strong GDP predictions, higher tourism levels and increased government spending.
He said: "For companies in the Far East to survive they have to restructure and are now in a much leaner position today than they were three years ago."
Markets that Legal & General sees as particularly promising include Taiwan, Korea, Hong Kong and Singapore, which have embraced corporate restructuring and are set to benefit from the global outsourcing trend of Western companies.
The major risks to this positive outlook include a crash on Wall Street, the Fed further tightening its interest rates or the yen strength destabilising the region. Justin Bacon, fund manager for Asia at Legal & General, said although the strong yen could inhibit a Japanese recovery, it could also be a driver for more Japanese companies to move production overseas, especially to the benefit of Taiwan and South Korea.
He said an example of the current trend of Western companies looking to improve their cost position via outsourcing was demonstrated most recently by the Marks & Spencer's announcement that it would increase the proportion of its clothing manufactured overseas. Bacon said the potential outsourcing benefits were not being fully reflected in valuations, adding to the appeal of these companies.
Rough said one of the big issues hanging over the Far East is the effect of millennium bug, which he expects will not have the adverse impact that is anticipated.
He thinks markets will fall back further as the year end approaches, making stocks even more attractive from a valuation point of view. In such a scenario, Rough said Legal & General might use this as a buying opportunity.
Closer to home, Legal & General is looking to retain modestly overweight positions in UK smaller companies, although this position has been trimmed back in the recent past. Although the group predicts further long-term strong performance from the asset class it anticipates a flat three months ahead. Lesley Chorley, associate director, smaller companies at Legal & General, said smaller companies have returned 30% year to date compared with the FTSE 250 at 16.9% and the FTSE 100 at 2.1.1%.
She added: "Negatives have now started to outweigh positives for smaller companies As interest rates increase, the continuing strength of sterling will affect export earnings. It is currently the telecoms, financials and oils which are involved in corporate activity, and these companies are not represented among small caps. Additionally, smaller companies are also potentially at greater risk of millennium bug problems, either due to limited resources or simple lack of focus.
"However, small companies are relatively cheap, trading on P/Es of 11.8 times, compared with 25.1 times for the FTSE All-Share. Corporate buyers are active and some smaller companies are looking to private buybacks."
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