Fidelity's head of research for European equities, Henk-Jan Rikkerink, has outlined eight core themes revealed in a recent survey of the group's investment professionals.
The research, which polled over 100 equity and bond fund managers and analysts worldwide, identified long-term trends Fidelity will aim to take advantage of within its portfolios.
1. Economic growth and investment returns diverge
There is little correlation between economic growth and the performance of stocks, which is why stockpicking can add value. An economic and politically volatile world in the West will likely remain for several years, said Rikkerink. The gulf in growth rates between Europe and Asia will eventually narrow, and in the meantime, investors can find investment ideas in both regions.
“Select sectors in ‘low growth’ countries may outperform due to unique factors. In Europe, for example, some multinationals with geographically diversified earnings remain very profitable despite the region’s recession,” Rikkerink added.
He said investors should use metrics such as reinvested dividends, valuation, and earnings per share to assess the drivers of returns within particular markets.
2. Picking the long-term winners in a globalised world
Companies that can win in their industries will be the best investment for the longer-term, Fidelity predicts. As weaker players exit the market amid tough economic conditions, stronger companies see their market share grow.
Examples of well run, stable firms that have had a strong presence in their markets for a long time include Volkswagen in the auto sector and Nestle within the food sector. Those businesses with unique products will also have pricing power for years to come, the group said.
3. Searching for income in a low interest rate world
The present market offers investors the chance to access attractive yields without taking on significantly more risk, by choosing flexible fixed income products, quality-focused equity portfolios, and commercial real estate funds.
At the stock level, Rikkerink gave Microsoft as an example of an attractive dividend payer with a 4% yield and room for growth, despite some investors’ misgivings about its product offering in the face of tough competition from Apple and other tablet makers. “Some 30% of European companies have their equities yielding more than their bonds, so it should be a no-brainer,” he said.
4. Technological innovation still a game-changer
‘Big data’ will be a huge theme in the tech space in the future, according to Fidelity managers. “90% of all data in the world today was created in the last two years. Companies need to make sense of it, and this will be a multi-year theme,” said Rikkerink.
Software manufacturer SAP is one firm that could stand to benefit from this, while the makers of handsets and components for smartphones, such as Samsung and ARM Holdings, will also do well as ownership of these gadgets rises, especially in under-penetrated emerging markets.
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