What do CIOs think this year will hold? Pirkko Juntunen asks 11 of them
Looking ahead to the coming year, there are a few themes that are universal regardless of the style of the fund manager. The US economy and the credit crunch are mentioned as potential problems but the majority of managers remain fairly optimistic and believe opportunities continue to arise, particularly in emerging markets and Asia, as well as other areas, such as hedge funds and commodities. In addition, most agree that investors will remain risk averse and look for simple assets, moving away and staying away from securitised products.
US economy and the dollar
The financial market volatility and uncertainty continue to mar the outlook for the US. Of particular concern is the affect the sub-prime mortgage crises will have on other areas of the US consumer credit, with weaker consumer spending, a worsening employment picture and housing markets all creating concern. Adrian Jarvis, CIO at Morley Fund Management, says having two sources of uncertainty, such as the US economic outlook and the credit crunch, bodes for difficult times. However, he and many of his colleagues believe that there is a likelihood of the US economy rebounding after a slow first quarter, giving reasons for optimism for the second half of the year.
Fernando Ribeiro, head of investments at F&C, says: “The US labour market remains relatively firm, and while the manufacturing cycle and consumer spending are beginning to slow, the trend is not severe and we continue to be in an environment of slowdown rather than recession.”
The weakening dollar is being watched but many argue that it is not necessarily negative although there are concerns over reaction in the US, particularly in a presidential election year. Alan Brown, CIO of Schroders, points out that at $1.50 to the euro, the dollar is fundamentally about as cheap as the euro was when the exchange rate was $0.84/€1. “However, in an election we are concerned that there is the potential for a populist rise in protectionist pressures,” he says. “We see this potentially both on the trade front and on the issue of foreign ownership of US assets. Foreigners already own about 45% of the Treasury bond market and close to 25% of both the equity and corporate bond markets. Any increase in protectionism could potentially open a trap door under the dollar and be seriously damaging to world growth.”
Equities vs fixed income
Fixed income continues to be seen as too expensive and likely to suffer as the liquidity crises remains. Despite the modest economic outlook, equities remain the favoured asset class, although many believe equities will trade sideways.
Peter Toogood, CIO at Forsyth Partners, argues that from current levels equities remain preferred to other asset classes on a six to 12-month view. High levels of financial market volatility will remain a feature, however, but should provide plenty of trading opportunities.
Marco Pirondini, CIO of Pioneer Investments, argues that while valuations are decent, momentum is deteriorating. Therefore, a cautious approach is necessary. He says Pioneer has reduced its equity allocations significantly since May/June but remains overweight, although less so. Fixed income provides little value and although credit spreads have widened, it has not been enough, he adds. In addition, government bonds in the G7 continue to offer low returns.
However, some are more positive on the bond markets. BNP Paribas Asset Management recently increased its bond holdings to an overweight position. “We are not expecting strong performance from bonds but at the same time you do not lose a lot of money,” says Christian Dargnat, CIO of BNP Paribas Asset Management. He says the way forward is cherry picking among issuers.
Swiss fund manager Sarasin remains overweight in equities and underweight bonds. Burkhard Vanholt, CIO, says Sarasin’s long-term themes have held up and argues that its analysts and fund managers concentrate on larger picture issues rather than on market noise. “Aren’t there more interesting things to focus on?” he asks. He uses the example of showing a recorded basketball game asking the viewers to count the number of passes one of the teams makes. Afterwards most come up with the correct answer but asked if they saw the gorilla on the court, the audience is baffled. When the video is played back it is clear that a gorilla does indeed walk onto the court, but the viewers missed it, as they were asked to concentrate on something else. Vanholt says it is a reminder of how little it takes to miss the really interesting events. “We are looking for are the real gorilla scenes.” For Vanholt these include demographic changes and innovations.
The return of volatility is not viewed as wholly negative, particularly not for hedge funds. The majority of CIOs interviewed agree that the ability to trade and move quickly will be key this year.
Chris Jones, CIO of fund of hedge fund firm Key Asset Management, says recent years have been unusual and scarily un-volatile. In particular, he sees opportunities for long/short managers as shorting opportunities are coming back. “There are many opportunities in developed countries because of misevaluations created by the recent volatility,” he says. Managers who have not performed well in the equity bull market, such as fixed income value arbitrage managers, are also coming back, he adds.
Chrisophe Bernard, CIO of Union Bancaire Privee (UBP), says UBP has increased its allocation to hedge funds. Its average portfolios now hold 40% in alternatives, with 30% in hedge funds and 10% in commodities. Bernard argues that because equities are likely to trade sideway and bonds have little value, hedge funds will outperform those asset classes as well as equities.
Co-CIO Jonathan Coleman at US fund management house Janus, detects the rise of an emerging middle class from formerly government-dominated economies now embracing a free market structure like China, India and Brazil. “Within these countries we have identified three distinct investment opportunities to capitalise on this trend: industrialisation, commodities and consumer spending,” he says. “The rapid growth of industrial cities across China is changing the demographic make up, with 2% of the population moving to the cities each year. Higher paid employment is translating into increased demand for all goods and services. This has had a knock-on effect on demand for commodities from Brazil, which in turn has led to a boom in its domestic economy. Many of the best investment opportunities are now in areas ranging from residential housing to cars, and directly to consumer credit and consumer goods. In India, the provision of quality IT services has led to a similar rapid growth in disposable incomes. This collective purchasing power has created a whole new pool of investment opportunities.”
Marino Valensise, CIO of Baring Asset Management, believes China is a good bet. “The number of IPOs is rising, as a component of the MSCI World index it is rising, and the percentage it contributes to global GDP is also increasing, all reasons for staying in the market as many fund managers will have to rebalance to reflect the changes.”
Whereas most agree that financials will continue to struggle because of credit issues, commodities continue to find favour among investors, as seen by UBP’s 10% average allocation to the asset class.
Barings was aggressively overweight commodities and materials throughout 2007 and continues to rate the sectors, says Valensise. He is less convinced by telecoms because of the lack of interesting opportunities, apart from a few in emerging markets. He also says the choppy markets have little logic and one theme that most count on in times like these is large vs small caps. “However, even this is tough as there are financials and banks among the large caps,” he says.
Coleman says opportunities are created by the fragmentation of a mass market, driven by technological advancements, in particular, the increase in choice and differentiation among media providers with targeted consumer web sites such as My Space and Facebook. They attract a growing number of users that in turn drives higher spending on internet advertising. In the food and drink market this trend has led to a huge increase in specialist sports drinks, juices, flavoured waters and energy drinks.
Healthcare is another sector he favours as a result of the ageing population. “Within this sector the three most promising themes are biotech companies producing the new drugs, medical device companies offering new ways to keep ageing baby boomers healthy and health maintenance organisations focused on controlling costs. We believe these trends will continue to show high rates of growth and suitable opportunities for investment across the world.”