The Best Opportunites Lie Overseas
We would like to start the new year on a positive note by sharing our belief that the world’s major stock markets will end 2007 higher than 2006. A lot of our portfolios have a global outlook and have benefited from the superior returns of overseas markets. To put this in perspective, Europe was in fact the worst performing continent in 2006 and within Western Europe, the UK stock market was the weakest.
Having said that, the UK stock market ended the year up, after staging a strong recovery following a severe fall in May. The loss of value was the fastest witnessed on the UK stock market within any four week period in the last 35 years with the sole exception of the one day fall on black Monday in 1987.
Investors reacted to the fall by moving more money into defensive stocks in an attempt to preserve capital. In our opinion, these so called ‘defensives’ - including utilities, food retailers and food manufacturers - are now so expensive as to carry inherent risk. We doubt investors are aware of the growth assumptions the current share prices imply and think it is particularly ironic that the utilities can attract such high valuations when earnings growth is restricted by Government regulation.
We have stuck to our guns and concentrated our investments in the media, financial and telecoms sectors in the UK and through global sector funds. We have also made significant investments in overseas markets, primarily Asia and Latin America.
Instead of investing in UK listed resources companies as a play on the growth in China and India, we invested in Far Eastern markets directly through carefully selected country specific and regional funds.
The performance of the Chinese stock market was the most pleasing. Having had a poor 2005, the Hang Seng rewarded the positive moves made by the Chinese Government and monetary authorities in 2006;the Government initiated regulatory changes to improve corporate governance and transparency making the market more attractive to outside investors and the monetary authorities imposed tougher capital requirements and bad-loans ratios to rein in the pace of lending.
The high returns from emerging markets whether in Asia, Latin America or Emerging Europe, cannot be matched by the more mature markets. We are presented with (and are making the most of) a great opportunity to benefit from the growth of the domestic economies of these emerging markets. As larger sections of the population are encouraged to share the benefits of economic growth, we are particularly excited about investment prospects in the area of consumer goods and financial services.
Whereas we are avoiding consumer related stocks in the UK and US stock markets, we think the financials are an interesting sector to invest in on all continents. In addition to stock picking, we are also investing in global financial sector funds giving us exposure to banks that would otherwise be out of our reach.
To wrap up the old year and see in the new, we are therefore keeping hold of our overseas investments, complementing them with our global sector funds and large cap media, financial and telecoms stocks.
We would like to wish you all a very happy new year and every success with your investments.
31 December 2006
