The 12 hot investments our experts would buy into now
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MoneyWeek Editor
John Stepek Nov 20, 2009
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John Stepek chairs our panel of experts and asks where they would – and would not – place their own money in today's markets.
John Stepek: Asset prices are soaring across the board. Have central banks pumped up yet another bubble?
Tom Beckett: One reason that financial markets are going up is because there is very little else to invest in. I find it difficult to find genuine bubbles right now. I'd say equity markets are probably at about fair value, as are commodities. But monetary policy is certainly far too loose for the recovery we're anticipating.
Alex Breese: There isn't a bubble now, but we may be laying the foundations for one. Where it will show up is hard to say. The most obvious place would be high-growth emerging markets. But there's a way to go before that happens. And on a p/e or price/book basis, European equities for one look quite cheap.
Julian Pendock: I completely agree that Europe is fair value, which is why I see it as a cheap way to play a potential emerging-markets bubble. If you can buy Unilever (LSE: ULVR) at one-quarter of the valuation of its listed subsidiaries in Indonesia, then European equities aren't in a bubble. But I do find it interesting that first Federal Reserve chairman Ben Bernanke, and now members of the Bank of England's Monetary Policy Committee, have said that their actions are targeting asset prices, whereas before they were flat out denying it. And if there isn't too much money flooding the system, then why is the gold price so high?
Alan Gibbs: The one place where I think we possibly already have a bubble is in bonds. Government bond markets and sovereign risk are severely mispriced. But I don't know what will burst that bubble.
Our Roundtable panel
Tom Beckett
Head of global investment strategy, Psigma Investment Management
Alex Breese
Fund manager, Neptune UK Special Situations
Alan Gibbs
Head of funds, JO Hambro Investment Management
Julian Pendock
Partner, Senhouse Capital
Julian: I think two things could pop it. Number one is things getting better. As conditions normalise, people won't be so keen to hold bonds. So that's a massive headache for the banks down the road, as they're buying more and more of them. The second thing could be market indigestion because of all the supply. It comes down to the question of when you call time on quantitative easing. What you don't want to do is let the debt markets call time on you, because by then the bubble's burst and you're in all sorts of bother.
Tom: If we're going to see economic recovery and a deluge of supply as quantitative easing ceases, then bond yields are going up. They could rise a long way in a short time, which would cause some serious pain, particularly for all those who've been flooding into bonds in the last year.
John: Could a developed country go bust?
Julian: Never say never.
Alan: You might very well see a big fall in a particular bond market, combined with a big fall in a given currency. That would be the manifestation of, if you like, a developed country going bust. It must be quite likely that will happen, but for now you're seeing relatively low levels of currency volatility.
John: So how should we be investing?
Alex: We're in a low-growth, low-interest-rate environment, which should be supportive of equities. There's a lot of cash sitting on the sidelines, earning low rates of return, which we think will find its way into the equity market. But we're coming to the end of the first stage in the bull market, which saw a mass re-rating from depressed valuation levels. The next stage is about finding stocks that can deliver above-average growth. Typically, these will be higher-quality businesses that can take market share from weaker competitors. I'd be far more careful now of lower-quality businesses, such as those that have recovered in the past six months. Tom: How do you judge how much cash is sitting on the sidelines? I wonder how much is left after the equity re-financings we've seen, and the money that's been raised by the corporate bond market.
Alex: There's $1.9trn on deposit in the US – that's a pretty big number.
Julian: But people have made that 'wall of money' argument about Japan, where it's earning 0.000%, yet it hasn't returned to equities. The best thing that could happen would be a correction – then people would feel they were getting a second bite of the cherry. But I agree with you on quality stocks. I'd look for firms with strong balance sheets and solid customer bases, such as infrastructure firms, where you know they'll carry on spending the government's cash; or boring staple goods firms that aren't restructuring, and which are exposed to emerging markets.
Alex: A lot of people are expecting a pull-back. But I don't think we'll get it. People are still pretty cautious, and that's a good environment for equities.
Gold's strength probably reflects the fact that there's abundant liquidity all over the place looking for a home
Tom Beckett
John: What would it take for the rally to hit a brick wall?
Tom: It would have to be the bond market blowing up. That's the only thing that could derail things in the short term.
Alex: A lot of emphasis is being put on growth in emerging markets, so hopes are high. If you see more cautious statements from China on economic growth, that could upset the apple cart.
Alan: A blow out in the bond markets would be bad news, but I think we're likely to get a deflationary scare first. If this is a normal cyclical recovery, you would expect the US consumer to be taking part reasonably actively, pretty soon. If we get evidence that that's not happening, markets could roll over.
Julian: The US consumer is in a mess. The savings rate has fallen again and the number of people who have been out of a job for more than five weeks is still going through the roof. By some measures, if you include the under-employed, then unemployment is up to about 20%. That will have a huge impact on consumption. I think that will stop the earnings recovery story in its tracks.
Alan: But when we get this next shock – whatever it is – how will people react? I think we're unlikely to get a simple replay of the last 18 months, with people going back into cash. I think people are wary of what holes they might dig for themselves if they do that again. So the response to the next crisis may be rather different. It sounds odd to say that people might panic into assets. But I think we're near the stage now where the money creation we've seen will encourage people to buy real assets – maybe wine, or gold, or good shares – more aggressively than they have to date.
John: What do you all make of gold?
Tom: Gold's strength probably reflects the fact that there is abundant liquidity all over the place looking for a home. And it could probably go a lot further still – people are genuinely scared about the value of currencies.
Julian: It's such an emotive subject. Some clients of mine carry Krugerrands around in their pockets. But if the currency system disappears, then nothing works, so there's nothing in the shops. So what are you going to buy with your gold? Ammunition and cigarettes would be more useful. In any case, it's not good for central banks to see the price of gold shoot through the roof. If gold starts to go much, much higher, I reckon we'll see massive G20 intervention. I say the G20 rather than the G7 because they're the ones with the money. They can go to the Fed and say: "Listen, we're buying your debt that's yielding not very much on a currency which is seeing annualised devaluation of about 20%." So central banks won't allow it to go that high – I can't see it going to $4,000 an ounce or anything like that.
Alan: I would still be extremely positive on gold. To put it simply, people and governments in the parts of the world that are making money – such as China – like gold. You can argue about whether that's right or wrong, but it's what they've always bought, and I don't see why they'll stop now. So I expect to see ongoing strong buying from individuals in India and China, and perhaps strong central bank demand. But what will send gold to $10,000 is if China goes wrong. Some people think China's current path is unsustainable, and that there's been huge misallocation of resources – and they may well be right. But if that blows up, the gold price will go higher than you could imagine, because the Chinese will buy it as a hedge.
We really like the tech sector – the businesses tend to be highly cash generative and have good growth prospects
Alex Breese
Julian: Anecdotally, Chinese friends of mine say they know a lot of people in China who like gold as a good way of getting money out of the country if things go wrong. But for me gold is a difficult one because it is also momentum driven. The more people think it's going to go up, the more people pile into it. And the other thing that's helped it is that it doesn't pay a dividend. So the opportunity cost of holding gold has gone right down as interest rates have plunged.
John: Do any stockmarkets look appealing?
Julian: The fund I run is pan-European. But I'm trying to run it globally as it were, so lots of the companies have global footprints. In Europe, you can buy truly global firms at a massive discount to US peers that are doing exactly the same thing. Most of their emerging market counterparts are a) far more expensive and b) tend to be far less global.
John: Which ones do you like?
Julian: I like power generation and transport group Alstom (Paris: ALO), which ties in with Warren Buffett's recent big bet on trains. The US transport secretary was playing around in TGVs in France not so long ago, and they are building them in the Middle East. It's got a huge order book, although the market doesn't seem to believe it is real, so the share price is frustrating me a bit.
I've also just bought Tognum (Xetra: TGM), which is 25% owned by Daimler. It makes specialist marine diesels called MTU engines. It has a blue-chip client list, including Siemens and Bombardier, and it does most of the engines for Sunseeker super-yachts. It also does very high-end on-site power generation – the Chinese are using Tognum's stuff for emergency-power back-up systems for their nuclear power stations. This is quite grown up stuff – you can't just buy it then rip off the technology – and that's the kind of company I'm looking for.
I always like Piaggio (Italy: PIA) because it owns Vespa. Piaggio already generates 20% of its sales volume in Asia and has just expanded into Hanoi. So you're playing an upshift in emerging market consumption as people get credit, get off their bicycles and get onto scooters. And US sales are through the roof.
Tom: I'm a bit concerned about emerging markets, where the uniformity of bullishness is quite stark. I'm just back from a few weeks in China and the overcapacity there is really quite scary. In the export hub of Guangzhou in the south I saw more vacant commercial property than I've seen in my life. And if you go down to some of the tropical holiday resorts, they're building whole new cities – even although the vacancy rate is probably about 75%.
John: As an Asia manager, Alan, what do you make of that?
Alan: What you must remember is that this is a pretty well-rehearsed pattern. If you look back over the last ten or 20 years, China has been growing at around 10%-a-year compound. What you've also seen over that period is classic counter-cyclical demand management. You've had three very big dips in exports, one in the mid-1980s, one in the mid-1990s and one just recently. Every time that's happened – not just this time – the Chinese come out and spend a lot on infrastructure.
What we're now waiting to see is whether consumer demand picks up again, first from the West and secondly from China itself. Now, I think the next big dip could come when the Western consumer fails to pick up the ball and run with it. But if we just look for now at Asian and Chinese consumers, the portents from the last six to nine months are positive.
You've seen a very strong market in cars. China this year will make and consume 13 million cars and trucks, about three million more than the US. We've also seen a big snap-back in residential property. If you're looking to understand consumer patterns, cars and residential housing are the two most important markets. If they move, other things tend to move. So I think the portents are pretty good.
John: What should investors be buying in Asia now?
Alan: There's a lot going on in Asia, but ultimately what happens in China is the most important thing. China has only succeeded in the last ten or 20 years through building up its infrastructure. Consumption trends that, as we all know, have to be maintained and accelerated if the imbalances in the world are to dissipate, depend directly on China continuing to build out its infrastructure. So I would buy property and infrastructure in China.
The largest company in my fund is West China Cement (LSE: WCC), which is part of a fast-growing cement firm based in Shaanxi province. That's a direct play on Chinese infrastructure. One consumer stock I like is Tsingtao Brewery (HK: 168), China's number-one brewer. In China they drink 30 litres of beer per head per year. In America and Europe it's five or six times that amount. So you've got built-in growth. The firm, à la Warren Buffett, also has a good moat – its distribution network would be hard to copy. It's not particularly cheap, but I think it's a very good long-term investment.
One other quick suggestion: China Overseas Land (HK: 688). This group is China's biggest residential property developer and there is enormous pent-up demand for residential property in China. The company is well run, well financed, and it operates countrywide.
John: So if there's a Chinese property bubble, it's still a while from popping?
Alan: That's my view. I may not be right!
Julian: Do you think a lot of the inflows into emerging markets are a result of a dollar carry trade?
Alan: I've no idea. To me it's the most obvious thing in the world: your money should go into the productive, high-growth areas of the world and the East is a very good example of that. Whether people are actually borrowing dollars to do that I have no idea.
Our Roundtable tips
John: Alex, what have you been buying?
Alex: We really like the tech sector. It did badly after the tech bubble burst and didn't participate much in the last bull market. Hence management teams haven't been encouraged to gear up their businesses and so their balance sheets are healthy. The businesses tend to be highly cash generative and also have good growth prospects. We like FTSE 250 stock Spirent (LSE: SPT). It makes testing equipment for wireless devices. It's a good play on fourth-generation mobile networks and smart phones. It's number one in what it does and has strong relationships in economies such as China.
A good large-cap is Rolls-Royce (LSE: RR). It's a high-quality business, with very high barriers of entry, and it's well placed to benefit from commercial aerospace growth over the next ten years.
John: Where do you think that growth will come from?
Alex: There's huge opportunity in Asia. The US aerospace market, which is the largest in the world, has about 7,000 commercial planes servicing a population of 300 million. If you look at India, you've got about 300 planes servicing a population of over a billion.
We also like small-cap Intec Telecom Systems (LSE: ITL), which provides billing software and support services for the telecoms industry. It has a geographically diverse revenue base and is number one in its field. New management has turned the business around, invested in the product and I think you could eventually see an approach for the company – if you look at its rivals, they've all got a lot of cash on the balance sheet, and they've been bid for in the past.
John: Tom?
Tom: In terms of asset allocation, we've got nothing in bonds. We've sold all our high-quality, investment-grade credit, which I think is probably priced for perfection. I think stocks will probably keep rising, but I'd rather play high-quality developed world companies with decent exposure to emerging markets, alongside some higher-risk recovery plays. Our top pick in the UK would be the Investec UK Special Situations Fund (tel: 020-7597 1900), which should generate decent returns.
And as I said last time I was here, over the long term, agriculture could be the most exciting asset market for the next decade. We're playing that through the ETF Securities Agriculture ETF (LSE: AGAP). Given that there's more money in the emerging world now, and that they want to have similar diets to the West, there will be a lot of upward pressure on agricultural prices.That's not even factoring in desertification and global warming. Having just spent time in China, you could see problems with water pollution and a lack of water. On top of that, agriculture has lagged this year and hasn't been caught up in the commodity rush, so it still looks good value.
John: Thanks everyone.
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