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Psigma’s three best ideas for global equities in 2017

20 January 2017

Japanese equity and healthcare stocks are among Psigma’s top picks this year for investors positioning themselves for the long-term.

By Jonathan Jones,

Reporter, FE Trustnet

Investors need to take a long-term view and focus on sectors that have structurally sound growth prospects, according to the investment team at Psigma Investment Management.

With further uncertainty anticipated in 2017, investors will have to cut through some of the market noise and start backing growth stories in search of higher returns.

Tom Becket (pictured), chief investment officer at Psigma, said: “As we look forward from now there are such a wide variety of political outcomes it is difficult to determine exactly what happens next.

“I think until we see Donald Trump inaugurated and see what he tweets in the next 100 days after that, it’s going to be very difficult for us to really guess what is going to happen for the global economy.”

With the inauguration of Donald Trump as US president, elections across Europe and Brexit negotiations all expected to move market, below Psigma considers the areas that could provide more plain sailing for investors.

 

Japanese equities

One of the key themes for Psigma in 2017 is earnings growth, with countries able to provide higher earnings growth more likely to succeed.

Psigma head of investment strategy Rory McPherson said: “One of the keys in this environment is earnings growth – it has to come through.

“We are slightly sceptical of some of the earnings growth forecasts across the globe, but the ones that we do believe in are the ones where they have generated earnings growth before and they’ve got room to grow their profits – Japan being the key example.”

Senior investment analyst Daniel Adams added: “Earnings are generally low but growing whereas if you look at the rest of the developed market they are very high and coming down – so we think that’s very positive.”

On a wider level, he notes that the country also has a “very accommodative government in charge which is pro-growth pro-recovery which we think is positive”.

Additionally, markets have failed to recognise the improved investment outlook for Japanese companies with valuations remaining extremely low.

“There is a huge amount of cash in balance sheets so that gives companies a huge amount of flexibility to either increase share buybacks, pay dividends or increase capex, which again is very constructive for Japanese equities,” the analyst said.

Indeed, more than 12tn yen (or £2tn) are sat in company balance sheets, which could provide the stimulus for a recovery.

The market has lagged since hitting its peak at the end of the 1980s and is currently hovering around pre-financial crisis levels of 2007.

Performance of TOPIX since 1980

 

Source: FE Analytics

However, Adams sees corporate governance changes as the catalyst that could propel the market ahead over the coming years.


“As you know equities can remain cheap for some time so you need a catalyst and one of the most important changes we have seen over the last couple of years is the change that is happening with corporate governance, which has really taken a change for the better,” he said.

“One tenet of having corporate governance is to have true independent directors on a board and over the last four to five years it has increased rapidly.”

Remuneration is changing as well, with directors now being paid based on performance – something that has been adopted by the Western markets but has been lacking in the Japan.

Psigma is using the RWC Nissay Japan Focus fund as its avenue into Japanese equity, which has returned 29.26 per cent since launched in March 2015 compared with the market’s 0.43 per cent.

“It’s very concentrated and specifically targets companies that are open to improving shareholder returns and what they try and do is get involved in the company,” Adams said.

 

Emerging market growth

Another option for investors is the emerging markets, which despite a barnstorming 2016, Psigma says has long-term growth potential.

“Everyone thinks emerging market growth is over but we don’t here and one of the areas we are particularly bullish on is Asian consumption,” Daniel Adams said.

“In China, the service sector is much more important than historically. As of now it is about 50 per cent of total GDP whereas the industrial side is collapsing and not only this but it is actually growing at 6 per cent a year.

“So while the industrial side is collapsing, really it is the services side that is supporting that high growth in the Chinese economy.

“Domestic demand and local consumption should occur almost independently of what goes on in the global economy and we think that is incredibly important.”

While emerging markets performed well in 2016, the MSCI AC Asia ex Japan index struggled, returning 6.44 per cent to investors last year.

Concerns over the Chinese economy following the devaluation of renminbi at the end of 2015, dogged market, but Adams suggests investing with a consumption bias.

He said: “The fund that we have selected to invest in – and we haven’t yet but it is imminently being added to our buy list - is the Macquarie Asian All Stars.

Performance of Macquarie Asian All Stars vs index since launch

 

Source: FE Analytics

The $224m fund has outperformed the MSCI AC Asia ex Japan since launch, returning 12.93 per cent, but struggled last year, losing 6.15 per cent.


“It really plays into this consumer side. They have fundamental and rigorous bottom-up analysis,” Adams said.

“They really look at trends and identify companies that can benefit from these tourism and consumption trends.

“The fund is small and nimble so it can exploit these opportunities and it’s a stable team with accountability, motivation and alignment.”

 

Healthcare

“Healthcare is an interesting one because historically it has been a defensive play and it certainly is a defensive play but what we think is particularly interesting is the structural growth story,” Adams said.

While healthcare in the US has come under fire, first from Hillary Clinton and more recently by president-elect Donald Trump’s announcement to repeal Obamacare, Adams says there remains an opportunity to buy into healthcare stocks globally.

He says an ageing population in some of the largest drug consumers in the world, such as the US and Europe, are beneficial as older generations tend to demand more healthcare services.

There has also been an increase in the emerging middle class in Asia that is going to command higher healthcare costs as well.

“We think there is a long-term structural growth trend in healthcare. Everything is supportive of that long-term theme,” the analyst said.

“The position we own is in Polar Capital Healthcare Blue Chip. We approached them in 2014 and we said we want access to this but we want less exposure to biotech and more into the long-term structural theme that will also offer us some defence.

“So they launched a fund with us seeding it and we are the largest holder in that and we are still – so it’s almost like a specific mandate and the size of our position in the fund gives us influence on how it is positioned.”

Performance of Polar Capital Healthcare vs index over 1yr

 

Source: FE Analytics

The $78m fund run by Dan Mahony and Gareth Powell has performed well against the MSCI World/Health Care index, returning 21.70 per cent (17.26 percentage points ahead of the index).

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