A failure to deliver QE3 in the US or a sustainable solution to the eurozone crisis will result in a buying opportunity on the same level as March 2009, according to Premier’s Mike Jennings
and Jake Robbins
Both global managers are bullish about equities in the long-term, but believe any disappointment on the downside could push valuations down to historically low levels.
"If quantitative easing, which is widely expected, isn’t implemented in the US, or the ECB doesn’t deliver on the goods that it has promised, a market fall could see valuations akin to March 2009 within a couple of months," said Robbins, who heads up the Premier Global Alpha Growth fund.
"Equities are attractive now, but any disappointment will make an entry point even more attractive."
Mike Jennings, Premier’s chief investment officer and manager of the Premier Global Strategic Growth fund, added: "At the moment we’re drawn by high-quality industrial companies with a higher Beta, but we don’t want to be too geared for a market rally."
"The markets are bound to react to any disappointment with a knee-jerk reaction, because they’ve risen on expectations that are yet to be fulfilled. I’m inclined to think the market may have got ahead of itself."
"If I were making my judgments on a one-month horizon, I’d probably be selling."
Since the start of March 2009, the FTSE All Share and S&P 500 are up 74 and 81 per cent respectively, in spite of last summer’s severe downturn.
Performance of indices over 5-yrs
Source: FE Analytics
Jennings (pictured right)
, an expert in top-down macro management, believes the intervention of politicians in matters such as the US fiscal cliff and eurozone crisis has made it nigh on impossible to second-guess the movement in the markets.
While this has clearly been frustrating for managers, Jennings says the macro uncertainty has created a number of long-term opportunities in the global market.
"When stock analysts are asked about what’s going to happen, they have little answer. In many cases they just have to leave earnings projections the same," he explained.
"We’ve found that a number of quality companies have been de-rated for little or no reason, because there is so much paranoia about the macro environment."
"Even if their competition is bad companies that are going bust, they fall by the wayside because expectations are so low."
"Take banks, for example: we don’t hold anything in European banks, which remain undercapitalised, but the US system is, if anything, over-capitalised. Because they’re banks, they get tarred with the same brush, but many companies are in very good shape."
He points to US-listed Caterpillar as a good stock-specific example:
"It’s been de-rated due to worries over growth, but US housing, which is the company’s biggest market, has totally stabilised. This is a high-quality business with good visibility and pricing power. For us, it’s a no-brainer."
Premier Global Strategic Growth
and Premier Global Alpha Growth
both use a quantitative and qualitative screening process to help with stock picking, focusing on three specific areas: quality, value and growth.
The first process looks at company fundamentals, such as cash flow and balance sheets; the second at traditional measures of valuation such as price-to-earnings and price-to-book ratios; and the third at potential catalysts that are expected to stimulate growth.
Robbins and Jennings say that high-quality stocks are the current sweet-spot, as many tick all three of the boxes.
"Of course quality screening tends to favour defensive companies by definition, but the problem now is that valuations on a relative scale are less attractive," Robbins continued.
"Cyclical companies are very cheap indeed, but we’re looking for the best of both worlds – that is economically sensitive companies that have strong balance sheets and big cash-flow yields."
"Some of the companies we’ve found have more than 20 per cent of their market cap in cash and are spending their money in a very efficient way."
"Unless the end of the world is around the corner, I don’t see how these companies can keep trading on these valuations."
He lists Philips Electronics, which has recently been taken over by new management, and Pernod Ricard as good examples.
The managers are particularly bullish on commercial aerospace as a sector, holding Zodiac Aerospace, BE Aerospace and EADS [European Aeronautic Defence and Space] in their portfolios.
Performance of funds vs sector over 1-yr
Source: FE Analytics
Both Premier portfolios have underperformed their sector average over three years, but their overweight in cyclicals has led to stronger performance over 12 months.
Both have a minimum investment of £1,000, though with a total expense ratio (TER) of 2 per cent, the racier Global Alpha Plus portfolio is more expensive. Premier Global Strategic Growth has a TER of 1.71 per cent.