Global equity investment opportunities abound for those prepared to seek them out. But they’re not always where you expect them to be, and you don’t always get to them the way you might think. Simon Hoyle reports.
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Making the most of the opportunities in global equities requires a bit of lateral thinking.
It’s not always necessary to invest directly into a particular country to take advantage of its economic potential. And it’s not always necessary to invest directly in a specific industry to enjoy the fruits of its growth and development. Emerging markets are increasingly being thought of as more than just BRICs (Brazil, Russia, India and China); and even exchange-traded funds – those boring, staid old ETFs – have a role to play in capturing global equity market opportunities.
The world has seemed a more fragile place since the peak – or should that be trough? – of the global financial crisis (GFC). Recovery has seemed somewhat tentative, and prone to being easily set back.
But as signs of recovery begin to look more sure-footed, opportunities inevitably emerge for those investors prepared to dip their toes back into international waters.
Russell Investments’ March 2011 Investment manager outlook (IMO) report shows that professional money managers have never been more bullish on the outlook for global equities.
‘Major developed economies have started to show many pro-cyclical attributes’
“Sentiment towards growth assets hit a record in the March survey, with unprecedented support for global sharemarkets,” the IMO report says.
“For the first time in two-and-a-half years international shares were more favoured than Australian shares, signalling increased confidence in US growth and stability in other developed markets.”
Scott Bennett, a portfolio manager for Russell, says the strength of the Australian dollar is “making offshore assets appear cheap at current valuations, and with all signs pointing to a recovery in developed international economies, managers are seeing increasing opportunities offshore”.
The strength of the Australian dollar is presenting challenges to offshore investors, as well as opportunities. At the time of writing, the local currency was scaling unprecedented heights against the US dollar, and there was divided opinion on when, or if, it was likely to settle back to levels closer to its historical average.
Ron Bewley, a director of Woodhall Investment Research, says predicting the next movement in the currency is all but impossible; sentiment can drive currency markets for a lot longer than investors might like.
However, Bewley says the key issue to watch in coming months is the policy of the US Federal Reserve. He says that if the Fed starts to signal that its program of so-called “quantitative easing” is coming to an end, then the next logical step is a rise in US interest rates.
A rise in US interest rates could change the interest rate differential between the US and here, and that would have an effect on the exchange rate.
Currency issues aside, the greatest challenge for investors looking offshore remains how to identify and exploit the best of a growing set of investment opportunities, and how to assess whether the signs of economic recovery that we’ve been seeing are the start of something good, or just fleeting.
“Global equity markets demonstrated resilience amid adversity during the first quarter of 2011,” Principal Global Investors says, in a recent review of global equity markets.
“The quarter began in optimistic fashion, but the mood understandably turned grim during March amid the devastating earthquake and tsunami in Japan, and the ensuing threat of nuclear disaster.
“Moreover, rising social unrest and a series of regime changes across the Middle East and North Africa culminated in military action by the North Atlantic Treaty Organisation (NATO) coalition forces in Libya.”
Principal says this raised the spectre of an oil shock as oil prices spiked to “well above $US100 a barrel”.
Recently, the earthquake that literally shook Japan figuratively shook financial markets, prompting regulators to take swift protective action.
“The Japanese market suffered declines of nearly 20 per cent in the week following the quake, but recouped more than two-thirds of the decline by month’s end,” Principal says.
“In response to a sharply rising yen, G7 policy makers undertook a coordinated intervention in the currency markets for the first time since 2000. This seemed to soothe market anxiety and set the stage for the ensuing rebound.”
Another global hotspot – Europe – also continued to receive regulatory attention.
“In Europe, sovereign debt concerns re-emerged, with Portugal joining Greece and Ireland on the brink of insolvency,” Principal said.
“These events all conspired to ignite selling pressure on equities, but a majority of regions and sectors rebounded in the closing weeks of the quarter to finish in positive territory.”
Principal added that “progress on the European Stability Mechanism (ESM) added a degree of comfort that sovereign debt imbalances will remain contained to the so-called peripheral countries and maintain liquidity, at least in the near term”.
Amit Lodha, portfolio manager of the Fidelity Global Equities Fund, says he is “cautiously optimistic” on the prospects for global equities.
Lodha says his view is based on an improving US economy. That, in turn, is a result of “recent actions by authorities there to stoke the economy”.
He says there’s now less likelihood of an economic “double dip”.
“On the corporate front, earnings growth should remain fairly strong going forward, although this is largely factored into stock prices. I also expect M&A [merger and acquisition] activity to be more prevalent this year, as cash-rich companies deploy their reserves to tap growth, which should be positive for markets,” he said.
