Attitudes to big geographical equity divisions are starkly mixed, with some fund managers favouring ...
Attitudes to big geographical equity divisions are starkly mixed, with some fund managers favouring Europe and Asia, while others fear these are exactly the areas heading for problems. The big global concern - the US - has pulled back some gains in the pharmaceutical and industrial sectors but, in contrast, technology has been disappointing.
Ken Cox, fund manager at Templeton, feels Europe is offering the most value at the moment out of all the mainstream markets.
Cox says: "In Europe, we favour paper and pulp stocks. This is because there has been an increase in demand for these types of products and capacity is low in the market place. We also likes media stocks such as Reed Elsevie, as this company has B6bn in free cash flow and has increased its dividend payments."
However, Threadneedle warns that Europe's economic environment has been slowing. French industrial manufacturing data for February has been falling, which has had an impact on the cyclical sectors.
More positively, Threadneedle feel M&A activity is continuing to rise in Europe, with investors preferring companies that reinvest profits in sensible corporate activity rather than undertaking share buybacks or issuing special dividends.
Cox views industrials as well as pharmaceutical stocks as favoured areas in the UK and the US.
"There have been reforms in these areas, valuations are low and companies are expected to grow in the long term." he says. "We have a similar view for the US and also favour industrials and pharmaceuticals. We like the pharmaceutical sector as people get older and live longer they will need more pharmaceutical products."
Threadneedle warns that a risk still remains for both the UK and US markets. Earnings results have been disappointing for some companies in the two countries. For example, US-based software companies have reported lower than expected earnings. Threadneedle has taken a defensive stance in the UK and has increased its exposure to consumer staples and tobacco stocks.
One area that Templeton is not positive on at the moment is Asia ex-Japan. Cox does not have a very big weighting in Asia as he is finding more value in Europe. Out of the Asian countries he likes Japanese telecom stocks as they have corrected from high valuations since the bursting of the TMT bubble.
Japan is also a favourite for F&C. Tony Broccardo, chief investment officer at F&C, thinks the area to be in is Japan. He says: "There are ongoing signs of economic and corporate improvement. Looking ahead Japan should see stronger profits growth, with robust business investment growth allowing for stronger household income and consumption through the remainder of the first half of the year. Valuations in Japanese equities also appear attractive, following a strong profits upturn last year."
But, Threadneedle's view of Japan is that the market has been rather quiet. Although machinery orders data was more than expected the sector failed to respond in performance terms. Real estate performed badly despite a lower Tokyo vacancy rate and better than expected official land prices. In spite of this disappointing short-term performance, Threadneedle has retained their holdings as the company believes the stocks will perform better in the longer term.
For the rest of Asia, Threadneedle feels that retail sales have been good. The planned opening of Hong Kong Disneyland in September is expected to boost tourism and retail further. In addition, China is liberalising the gaming sector in Macao.
According to Broccardo, global equity markets are unlikely to make much progress in the short term. He says: "Higher risk asset classes such as emerging markets are likely to go through a period of consolidation. A year ago our in-house models pointed out areas like emerging markets were cheap. The market rally since then has closed the valuation gap and despite the fact that we are bullish on areas such as Latin America in the longer term, this is not yet the time to commit new money there."
Threadneedle's view is Mexico has been held back by political noise surrounding the impeachment of Mexico City's mayor, who is also the frontrunner for the country's elections next year.
Warns on profits
Hargreave Hale seeking legal advice
Latest news and analysis
First mentioned in Cridland Report