As the easy money era enters its “final innings” investors must adjust their game, Will Low, Nikko Asset Management head of global equities, told a New Zealand audience last week.
And rather than relying on defensive shots Low said share investors need to get on the front foot with a strategic, attacking range of strokes.
“We’re at a fascinating juncture in market cycles,” he said. “Investors have been conditioned by quantitative easing (QE) to expect rising asset prices, and many assume that will continue.”
But Low said as the influence of QE inevitably wanes, strategies based on easy money assumptions could leave investors caught behind.
“Investors need to ask whether approaches such as low-volatility strategies – and other creatures of QE – are appropriate now,” he said. “Those strategies are very beholden to businesses linked to the environment we’re in now. But as stock-pickers we look for where the growth will be on a forward basis.”
According to Low, the QE-flooded investment world has floated share price/earnings to levels that imply “consistent and not insubstantial growth”.
“If this generation want to invest in the market and get the returns on the investment they have become conditioned to then one of two things must happen,” he said. “Either there are greater fools out there willing to pay a higher price or the implied growth in profits will arrive.”
On the first count investors can only be “hopeful” at best, Low said, while “the evidence on the demand side is weak”.
For example, he said investors expecting high-yield stocks – such as utilities, telcos and real estate investment trusts (REITs) – to keep delivering returns could be disappointed.
“In their desperation for yield as interest rates have fallen investors have sought safe, defensive income in equities,” Low said, with the demand consequently compressing yields.
“We see pretty high risk now in any stock where the performance is related to the fall in bond yields,” he said. “We’re looking for names where valuations are better and with one eye on what is likely to happen next. We want to find companies with their own economic drivers that are not related to monetary easing.”
Nikko has identified some of that growth coming from “secular disruptors” such as Facebook, which the global fund holds. Low said the fund is also overweight in the healthcare sector.
“But not with drug-producers,” he said. “We’re overweight in healthcare solutions providers – those businesses that are making healthcare more efficient – like [UK medical technology firm] LivaNova.”
The latest Nikko Global Share Fund update puts its healthcare exposure at over 21 per cent – almost double the benchmark.
While Nikko’s top 10 holdings are currently, with the exception of China’s media conglomerate Tencent, developed world stocks, Low said the fund has found increasing value in emerging markets.
He said emerging markets were in many respects better-placed than the developed world to prosper as monetary conditions turn.
“Over the last couple of years emerging markets have seen their currencies crunched on average, which has had the effect of a capital tightening,” Low said.
With easy money scarce, “marginal” companies have been forced out of business, leaving survivors operating as efficient, profitable entities.
“We’re willing to look at emerging market companies as much as in the developed world. We’ve been adding emerging market stocks over the last six months,” he said. “In fact, if inflation returns emerging markets are better-placed than developed.”
The Nikko global fund currently holds 46 shares with annual turnover of roughly 50 per cent.
In July last year the Nikko Global Share Fund changed from a multi-manager product to investing solely into the underlying Global Equity Fund, managed by Low. Over the 12 months to the end of August the Nikko fund returned just above par in Australian dollar terms, or -0.88 per cent below benchmark. In August, however, the fund returned more than 2 per cent, or 0.52 per cent above the index.
Nikko NZ still offers the multi-manager version of the global equities fund, according to the group’s website.
Prior to joining Nikko in August 2014, Low managed the high-alpha equity team at Scottish Widows Investment Partnership (SWIP) from 2012. Aberdeen Asset Management bought SWIP from Lloyds Bank in 2013.
Previously, Low worked at BlackRock as director and portfolio manager leading its Europe, Australasia and Far East teams.