Asset Value

“We remain in a period of high abnormality” said Glyn Owen, Head of Multi Asset Managers, Momentum, at their Think Tank in London, last week. “Low interest rates, low inflation and low growth add up to a global balance sheet which is in recession,” he expanded.

How odd is our current abnormal? When the Swiss government offers you negative returns, less than your capital back: “that’s abnormal” says Owen.

But doesn’t this mean that investors can’t make money. Owens considered warning is that low single digit returns, for at least this year, should be the “normal” expectation despite an unexpectedly good set of quarterly statistics from the world’s risk markets.

In such tough conditions, what are “flavour-of-the-month”? For Owen, fund managers should be after income producing assets, but US equities and high yield bonds, were also picked during the Think Tank sessions.

Last week we quoted Blackrock’s Andrew Warwick who said: “the US is the epicentre of the recovery”. More than one speaker quoted Warren Buffet: “it has never paid to bet against America. We come through things but it is not always a smooth ride”.

Yet, you couldn’t say there was a rampant endorsement of US stocks, rather a cautious recognition of an opportunity. To quote Buffet again: “If the market is down I am happier buying. If I go to the supermarket and they have reduced prices, I feel better. So if I go to the stock exchange and they have reduced prices I feel better”.

This leads to the question: which stocks? If the markets itself is well poised then investors will consider the cheapest way in, like exchange traded funds on the likes of the Dow Jones and S&P indices.

Mark Baribeau of Jennison’s had three sector preferences: technology, consumer and health. As Ben Leyland of JO Hambro also picked technology, lets hone in on that. For Baribeau, two drivers are forcing a structural shift in the technology world: cloud computing and the move towards greater mobility.

For Baribeau, technological change is evidence that “we are not in a global downturn, we are in a global recovery.” And, consumers are driving the structural change. “When your computer at home is better than your computer at work, that’s disruptive,” he explained.

Leyland listed the structural shifts as: smartphone’s moving quicker and selling more than televisions; and old business models changing with the erosion of traditional barriers to entry. The old names of the sector need to be more nimble in an Apple-esque way: Apple now hogs smartphone profitability (80%) with only 25% of the market, although domination of the iPad (90%) distribution is more complete.

Investment in the high yield debt market was promoted by Jupiter’s Ariel Bezalal. Our “Jargon Buster” this week shows the credit ratings of three of the biggest players in the business. Bezalal is positioned at the highest level of risk, around the investment grade/junk line.

If the Swiss aren’t even offering your capital back, there is no interest in government treasuries for Bezalal. However, there is a 3.5 per cent spread between government treasuries and the BBB world, which for Bezalal is a significant opportunity because “despite the wide spread, defaults are low”.

The writer is CEO of Mondial Financial Partners