3 January 2012

Philip Saunders and Max King, Investec Global Multi-Asset Team, explain why the best stocks to buy may still be the ones you wished you had bought a year ago 

1.    Corporate debt: returns should be reasonable
Corporate spreads rose in 2011 despite improving corporate finances whilst falling yields on government bonds kept returns positive. Corporate spreads should fall in 2012 but government bond yields should rise. Therefore returns from medium and high yield bonds should be good but investors will need to keep duration short for higher quality bonds.

2.    Emerging markets currencies and debt are attractive
Many currencies reached expensive levels in 2011, heralding a setback for local currency emerging markets debt. We think that setback provides a renewed investment opportunity with better value now apparent in currencies while the outlook for debt is improved by the peak in inflation and interest rates.

3.    Quality stocks will continue to out-perform
Investors continue to be tempted to invest in ’value’ or ‘recovery’ stocks (such as banks). While there may be selective attractive opportunities in these areas, the best returns will be earned from high quality companies on only reasonable valuations, but with sustainable growth. Megacaps, on average, are likely to continue to under-perform while the long term trends favour quality mid- and small- caps. The best stocks to buy may still be the ones you wished you had bought a year ago.

4.    Emerging market equities return to outperformance
After a disappointing year, continued earnings growth has re-established excellent valuations in absolute terms and attractive valuations relative to developed markets. A peaking of inflation and interest rates should be positive for most economies and any setback to growth in China will only be temporary. Fund outflows from emerging markets should turn into inflows as the outlook improves. Currencies appear reasonable value and markets which looked expensive, such as India, have come back sharply.

5.    Resource equities
The outlook for commodities may be subdued but we think the opportunities in equities are plentiful. The growth in natural gas and shale oil production both in the US and globally is transforming the outlook for energy and offers particular investment opportunities. A slow-down in China threatens demand for certain commodities in the short term but structural change is supportive in the longer term. Mining companies face the challenge of resource nationalism but the opportunity of bringing new production on stream.

6.    “Consumption is the sole end and purpose of all production” Adam Smith
Decades of economic convergence has brought hundreds of millions of new consumers to the market. In 2012, consumer spending will remain strong in emerging markets, particularly in Asia. This buoyancy will be driven by technology, consumer brands and luxury goods. Consumption in the US will continue to pick up, driven by low interest rates, falling inflation, improving housing conditions and stabilising economic outlook. The longevity of global brands will continue to justify higher valuations.

7.    Volatility
Volatility is likely to be a permanent feature of markets as a result of enduring nervousness following two massive bear markets in the last decade, computerised trading, the shrinking of broker positions, the decline of the specialists on the NYSE and the abolition of the up-tick rule governing short trades. Investors need to either look through short term volatility in making long term investments or use it to their advantage by buying when volatility is high and reducing when investors are complacent. We think it is better to be in markets and accept the volatility than miss out on long term opportunities. Market timing is not getting any easier and managers that depend on this for their returns are set for a lean period.

From a multi-asset perspective, we also see a range of long term opportunities in other areas. In equities, these include Japan, technology, international smaller companies and private equity. Absolute return bond funds should continue to do well and the poor performance of the hedge fund universe should not disguise the good performance and outlook for selective areas of alternative assets. Quoted infrastructure was a stand-out asset category in 2011 and should continue to deliver solid returns, and UK property Reits represent good value.

www.investecassetmanagement.com

ENDS

Notes to Editors

Investec Asset Management is an independently managed subsidiary of Investec Group. Investec Asset Management is a specialist investment manager, providing a premier range of products to institutional and individual investors. Established in 1991, the firm has been built from start-up into an international business managing approximately US $83bn* on behalf of third party clients. We have grown from domestic roots in Southern Africa and the UK to a position where we proudly serve a growing international client base from the Americas, Europe, Asia, Australia, the Middle East and Africa. We employ over 125 investment professionals. The firm seeks to create a profitable partnership between clients, shareholders and employees, and to exceed expectations for both client service and performance.

*As at end Sept 2011

 

For further information, please contact:

Vian Sharif                    +44 207 597 1834 / +44 7826 911 669

Investec Asset Management     

 

The information contained in this press communication is intended solely for journalists and should not be relied upon by private investors or any other persons to make financial decisions. All of the views expressed about the markets, securities or companies in this press comment accurately reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. Telephone calls may be recorded for training and quality assurance purposes.