While investing offshore is beginning to look attractive once again, even the experts recognise there are potential problems for the unwary among the opportunities, and that investing in international equities is not a ‘set and forget’ proposition.
North America
For many fund managers the United States is once again showing good value – despite the headlines – with both profitability and productivity climbing despite the US economy weathering a recession.
“The corporate sector moved fast, and companies and people have got back to work despite the impression that the wider economy was going backward,” Principal Global Investors chief executive Grant Forster said.
“At the same time the US has become energy self-sufficient for the first time in many years and the housing sector has also gone up, which are all positive signs for that space.”
A return to onshore manufacturing and an industrial renaissance has also boosted corporate cash flows and improved balance sheets, according to Certitude Global Investments chief executive Craig Mowll.
The actions of the Federal Reserve have assisted with these shifts, Lonsec senior investment analyst Rui Fernandes said, with easing debt prompting more spending and keeping inflation low. However the larger financial risk may not lie with the markets.
“One of the ongoing uncertainties is how the Government will continue to provide funding for its own activities. The fiscal cliff talks of earlier this year demonstrated that despite some good news, this remains an area of concern,” Fernandes said.
Further political tension is also a concern, according to Forster, with the two main political parties still holding deeply entrenched positions and “getting the parties to work together is difficult because at present they are as far apart as they have ever been”.
At the same time the Federal Reserve has also flagged further potential issues around liquidity, indicating it will stop buying bonds when unemployment reaches 6.5 per cent.
Central and South America
The southern neighbours of the United States will also be watching how its recovery progresses, as they have made the most of the focus that shifted away from North America and onto other markets.
In particular Brazil has and will continue to offer good value, according to Mowll, as its government has maintained a strong balance sheet and has a number of strong, viable sectors such as commodities, infrastructure, banking and consumer goods. Chile and Argentina should not be ignored either, Mowll said, as they boast developed economies and markets.
At the same time Mexico will continue to raise questions, according to Forster, as it seeks to make its way as the largest player in Central America.
“Mexico is politically stable and has benefitted from the revival in the United States yet, like much of the region, inflation and currency risk remain issues for the Government to manage. However there is a real desire to not revert to past failures or behaviours that led to them,” Forster said.
Europe
Despite the struggles of some European nations to bounce back from recession, and notwithstanding debate over the extent of austerity measures, European share values remain appealing in some quarters, with corporates and fund managers stressing that national economies do not reflect the state of equities within them.
“Stocks have been beaten badly in Europe, but this has created opportunities – and stocks in solid companies are cheap. Where companies have performed well they have been recognised, but in other cases they are not the best value for money,” Forster said.
Share values are appealing in this environment, according to Mowll, because corporate balance sheets have remained strong while the European Central Bank’s purchasing of bonds has kept the financial sector viable.
“We are keeping an eye on the low levels of sovereign debt and gross domestic product, but this means that active management is required to navigate a path to the best performing equities investments,” Mowll said.
While value may be found, Fernandes said it is a deep-value position which requires a strong risk appetite – given the levels of unemployment in parts of Europe and ongoing tension between proponents and opponents of the austerity measures.
Asia
Asian countries, in common with the United States, have been able to benefit from governments acting directly and promptly, something the European Union was not able to achieve.
Fernandes says nations in the sub-continent are less attractive, with India’s appeal marred by its messy political system despite a growing population and consumer middle class.
China continues to be regarded as stable. The recent transition of government leadership has disrupted neither its recovery nor the growth of its consumer market. Mowll said the worst of the slow-down in China has already been priced in, with consumer demand set to continue even as the building boom drops off.
“The strong political process and growing population in China have led to strong returns from China, driven by consumer spending as well as China’s expansion into producing and consuming technology,” Forster said.
“The trade that China and other Asian countries conduct with emerging markets is also providing boosts for both sides – and is taking place independently of developed markets in Europe and North America.”
Yet unlike Europe and North America, Asian markets still face possible threats from inflation, and from the ongoing daily impact on the wider population of food prices in the event these prices rise. However, Forster said if governments maintain the focus of recent years, both of these can be kept low.
