Thu, 17 Oct 2013
Fidelity fund manager Bill Kennedy is seeing stock-picking opportunities amid better investment prospects in Europe, improving consumption in Japan, and cheap P/Es in Korea.
Katie Reichart: I'm Katie Reichart with Morningstar. I'm here with Bill Kennedy of Fidelity and International Discovery.
Thanks for being here, Bill.
Bill Kennedy: Thank you for having me.
Reichart: I'd like to start out with Europe. How do you think the pace of the recovery is going, and how has that affected your portfolio position in the past few years?
Kennedy: The recovery in Europe is happening. It's happening very slowly. I'm not making a call that Europe is going to come back in a very strong way, but we're seeing green shoots of increased economic activity. I'll give you few examples. Companies are telling us that commercial real estate is starting to get a little bit better. A company that I own that's exposed to commercial real estate seems to be seeing increased activity. Advertising agencies are saying their European businesses are getting better. Property prices in Dublin have been starting to rise a little bit; they are starting to see property investors from overseas coming into Spain, so activity is picking up there.
In general I've been raising my weighting in Europe over the last two years ago, particularly two, two-and-a-half years ago, European equities were very cheap, particularly the growth companies that I like to buy were very cheap. So I've been gradually raising my weighting in Europe and clearly that's starting to pay dividends as a result of some of the better activity in Europe.
Reichart: Your fund's been underweight Japan versus the index. I'm curious if the country's economic stimulus measures have affected how you're thinking there?
Kennedy: Yes. My weighting in Japan has risen slightly. I'm still underweight Japan because I don't own a lot of companies that have structural challenges. There is lot of electronics companies in Japan that have kind of lost their ways. There are a lot of other companies that are just not very good stewards of capital and not growing very quickly, so I'm underweight those. But in general the exposure to Japan has been rising. What we're seeing from Abenomics and what we're seeing out of the BOJ has certainly been very positive.
But it's been not only positive for the macroeconomy, but positive for earnings. So we're starting to see consumption picking up a little bit in Japan. For instance, department store sales are starting to pick up a little bit, credit card activity is picking up a bit, real estate prices have been rising in Japan, albeit from a lower base. But in general, the economic signs are pointing in the right direction, so the portfolio does reflect that.
Reichart: Your fund typically does own some emerging-markets stocks. I'm curious what you're thinking is there. How were you approaching the sell-off earlier this year?
Kennedy: Yeah. A couple of things in emerging markets. Some emerging-markets are challenged by high current account deficits, and they've had to raise interest rates, when the economy has been slowing in order to fend off weakening currencies. So there's been a problem in several areas. India, Indonesia, Malaysia, and Thailand have had some issues there. However, if you look at other countries, like Korea, for instance, you can buy globally competitive good growth companies in Korea on single-digit P/Es, and that gets me excited. Korea has been largely ignored because it's been an emerging market; emerging markets haven't been a great asset class this year. However, I'm finding lot of cheap stocks there. I was just in Korea last week, and I was amazed at how many companies are trading at single-digit P/Es.
With Chinese equities, I have small positions in some online companies in China because they've been largely ignored because China has not been a great equity market. So, investors have been focusing elsewhere. That's been able to allow me to pick up some pretty interesting Internet companies in China at reasonable valuations, but with very, very good growth prospects over the next couple of years.
Emerging markets is a mixed basket, but clearly that makes for good stock-picking opportunities.
Reichart: Right. Bill, thanks very much for being here.
Kennedy: Thank you for having me.
Reichart: I am Katie Reichart with Morningstar.