We were recently asked to prepare an article which outlined five key investment themes investors should be considering today. We start with technology.
250 billion emails are sent everyday; 2 billion individuals are on the Web and there are over 10 billion internet-connected devices worldwide. The portability of data and increased consumer usage of smartphones and tablets presents an internet delivery mechanism which is driving the adoption of online advertising and e-commerce. Consumer scale is immense within developed economies. Couple this with rising household disposable incomes across emerging market economies and this points to a favourable outlook for market leading companies within the broad global technology sector. This is just one of a number of secular technology-led trends which, subject to sensible valuations, long-term investors should be taking advantage of.
Negative investor sentiment around the growth prospects for the sector, linked to patent expirations, healthcare reform and government austerity have been overdone. The ageing demographic in the developed world is a powerful shaping force in terms of demand for healthcare; and rising prosperity in developing nations will result in a higher proportion of GDP committed to the sector in these regions. The diversity within the sector also provides investors with the ability to swing from cyclical to defensive positioning in line with the prevailing economic cycle.
The on-going challenges presented by the economic environment and the tighter regulatory standards being imposed on banks are forcing them to deleverage their balance sheets. Asset sales, by European banks in particular, are presenting rare opportunities to invest in structured credit – a bond that is backed by a pool of assets - at compelling prices in a sector which has experienced a number of years of net negative supply. These positive technical dynamics for the asset class also combine with the floating-rate, senior nature of the debt, resulting in an attractive investment which is naturally hedged against rising interest rates.
As investment managers we constantly remind ourselves of the risks of becoming too fixated with the travails in Europe and, instead, focus on the need to maintain a global perspective. Brazil, Russia, India, China, Mexico, South Korea, Turkey and Indonesia are forecast to have a transformational impact on the global economy through this decade, increasing their collective GDP by US$16,000bn. Rather ironically, it is noteworthy these 8 countries all meet the economic rules defined in the Maastricht Treaty for EU member states to qualify for the single currency. Today, only 2 of the current 17 euro-zone members meet these same criteria. The difference is stark and we are firm believers the resultant migration of economic prosperity from the developed world to these Growth economies is a powerful investment trend.
*ref Goldman Sachs
Emerging market currencies
Leading on from this Growth economy theme, strong government finances are affording policymakers the flexibility to re-orientate economies and stimulate domestic demand. Currencies, which have been pegged to the US dollar, are being allowed to float either fully, or via a ‘managed’ process i.e. the Renminbi, which will also help control inflation; a growing issue for these economies. Foreign Exchange markets have features not shared by other financial markets - for example, international trade results in the ‘compulsory’ purchase and sale of currencies. For this reason, the overall contribution these economies make to global trade presents an investment case for increasing exposure to emerging market currencies within portfolios.