Europe Needs Credible Political Leadership
There are good opportunities in Europe if you believe that the region's political leaders will be able to hold the euro together, says Seven Investment Management's Justin Urquhart Stewart.
Holly Cook: I popped down to the London Stock Exchange recently to catch up with Justin Urquhart Stewart. He [gave] a presentation at the London Investor Show on Oct. 26, and ahead of that I wanted to get his views on a number of topics, namely his outlook for specific assets and regions, and also what lessons individual investors can learn from the financial crisis. Let's see what he had to say.
Justin Urquhart Stewart: I think investors are rather worried, and it's hardly surprising. When you look at the global economy, the news that they are fed every single day, it's hardly very encouraging. And so you see markets which are generally looking pretty erratic and when you are seeing an economy which has suffered the explosion--the huge financial devastations that you saw in 2008--well that's enough to put most people off until they can start seeing a trend. However, I think actually this is a time you should be looking very closely, because there are good issues there to be had.
Cook: So, that's an interesting point. I mean, trying to time the market can get you into a lot of hot water, but we do keep hearing again and again that European equities, for example, are at a really good place right now. Is this time to top-up do you think?
Urquhart Stewart: Well, you are absolutely right. Timing the market is always difficult, it's time in the market was always the phrase. Having said that, very occasionally you get something which I think John Cleese would normally refer to as ‘the bleeding obvious,’ when you come across something, companies, say you take a company like Siemens or BASF, where we have seen in the past couple of years a couple of occasions where that whole index and those stocks dropped by 20%, 25%. So, despite the issues of euro are you really telling me that these profitable businesses which are growing, suddenly are now three quarters of the values that they were?
So, you can look at that and say ‘actually that's a very good opportunity, I want to go and buy that’. But they come up every so often and quite rarely. Equally, of course, you don't have to be a stock-picker. You can just play that index and say that [European] index is being suppressed by the lack of credible political leadership. If you think that's going to change and the euro is going to survive, then there is a classic case of actually being able to pick up an asset at a discount.
Cook: So, you've mentioned the eurozone, and one small question for you here: what's your outlook for the eurozone, is it going to fail?
Urquhart Stewart: The euro is not going to fail. The euro is still going to be there. I can't say whether all the members are going to be in it or not…the sort of the likes of Greece. Because Greece isn't a financial issue, financially it's painfully but pretty small, it's a political issue. Actually the biggest issue when you look at it is ‘is it going to function?’ And a lot of people talk about German euro bonds and things, but frankly that's rubbish. Look at where the debt is, a lot of that's in the European Central Bank. Who owns the European Central Bank? Well, 27% of it is Germany, they are already on the hook. And Germany needs a eurozone, it's benefited hugely from the eurozone, but quite rightly they'll say we've benefited from it, but I'm not paying for somebody else's pension scheme, for example a Greek pension scheme where you retire early, don't save enough and don't pay your taxes. They want some discipline put back in, which is perfectly laudable, but equally you’ve got to balance that by also saying you also need to get a growth proposition in there as well and at the moment investors are looking at it and saying ‘where does the growth come from?’ and this is where we need tangible, credible political leadership.
Cook: I think undoubtedly there are some really important lessons for the politicians and the economists to learn from the financial crisis. What do you think are the most important lessons for individual investors to have learned over the last five years?
Urquhart Stewart: Over the past five years, and even make it longer than that; one of the first things to do before you opt for doing any investments at all is actually carry out some proper financial planning: what do you need to achieve by when? So you separate out your longer-term investing with broad asset allocation, spread around the world, which looks straight through shorter-term difficulties, which we may last a few weeks, a few months, because you're looking longer term. And then separate it out from your trading account, which hopefully isn't your pension, but something you can afford—and the definition of that is you probably can afford to lose it, you don't want to.
And there is nothing wrong with having a trading account, a ‘punting’ account to take advantage of those issues. Because sometimes there are particular themes which you want to try and follow. For example, in terms of say sovereign debt, sovereign debt frequently gets very, very pushed down and say some of the peripheral areas, there comes a stage where that's worthwhile having if you're willing to take that risk, but not with your pension money. And so what you need, what all investors need to do is actually focus on a few areas, don't try and be an expert in everything.
Pick up few areas and study it carefully and that may mean you're probably down to less than 10 stocks. But don't worry, you then become an expert in that stock; it’s just you and possibly the person in the City who is covering it--the individual who is responsible for writing it up--actually you'll find you probably know more than he or she does.
Cook: So we've already talked a little bit about the eurozone. Let's talk about some other themes. Looking ahead into 2013, developed world equity markets: do you see stagnant returns or do you think there’s going to be good opportunities?
Urquhart Stewart: I think there are going to be some interesting opportunities. Just look at the different areas. The United States, we all know has huge deficit, huge debt and from where we sit at the moment ‘who is going to win the election?’, we don't know. But whoever wins the election, whether the person who actually is going to raise taxes or cut taxes, the Americans will have one solution to everything: capitalism. That means they will put money in to get growth. I have never known an American yet to do austerity.
So they will do their best to try and get growth and be able to manage their way out of debt and deficit that way. That means, if it adds a bit more confidence--and remember confidence is a crucial word here--those corporates in America are sitting on huge piles of cash. I mean, you've got someone Apple at the moment, who in terms of value sits just under Norway and just above Argentina in terms of value. Well, that's a company with a lot of cash that could invest. I'm not saying it's going to do so, but it wouldn't take too much more investment for the market to start moving again and gain that vital bit of confidence.
So, for America, given the right circumstances in terms of what policies come out, I'm pretty bullish over that. And, when it comes to United Kingdom, of course slightly different issue here because of course, you have to separate out FTSE 250--primarily UK, [from the] FTSE 100--dominated by the extraction industries.
And if you think China is slowing down at the moment—and by the way, don't believe any of the growth figures out of China, I don't even believe our growth figures, let alone their growth figures, it varies hugely. Anybody who has been to China will know there are some areas doing pretty well and there are some areas doing pretty badly. Often you'll find most figures in China normally involve the number 8, that's because it's their lucky number. [China’s growth] will be lower and slower. However, it will still grow. Is it going to be a hard landing? Unlikely. But is it a bubble? No, more like a bar of Aero, I expect, if they all go off at the same time there will be a problem. But, what that means is, places like Australia and those minerals and those mining companies will be affected by that sort of slowdown for a period of time.
So, I'm probably less bullish on that, more interested in what's happening in the eurozone, more interesting with what's happening in the States. And finding those are encouraging areas, where I think you might get more focus.
Cook: So, we're talking here about regions. Would you prefer to be picking specific stocks within those regions or are you comfortable with, say, passively buying an index?
Urquhart Stewart: I like both. If you can follow half of dozen stocks and become experts in them, and I like doing that and I do that with my investment club. We have great fun doing it, we get some right, we get some wrong, but actually, we become quite good at investing in a few key stocks, then that's fine.
However, for my broader investment money, I prefer actually getting asset allocation and using quite a lot of passives. So, I can use ETFs, and I can use trackers, because these days compared to even five, ten years ago, I can cover the entire world and find myself with a balanced portfolio with an annual management cost of 0.5% and trading costs which are really pretty small in indeed. So I'm effectively now using institutional tools in the retail market.
So I think for private investors, this is very exciting. It may not sound as sexy as trying to pick individual stocks, but if you'd been able to pick up say the EURO STOXX 50 in summer this year, then you've made a jolly nice return, thank you, for not very much cost and for frankly investing in something which was pretty obvious.
Cook: So we've mentioned China. How about the other emerging markets? They've had a pretty volatile time as you might expect over the last few years. Do you think that they're still really a hot topic or has focus moved elsewhere?
Urquhart Stewart: They're always going to be a hot topic, because they are developing and exciting, but investors need to be wary. What's on those indices isn't necessarily what always gets the headline and also those countries often operate in a very different way. They have a different level of regulation, different level of overall control and in terms of just business maintenance.
So, for example, if I'm investing in Indonesia, I know full well that maybe some of the corporate responsibility in the Indonesian companies won't be the same as you'd see over here. So, people need to be very rather wary about what they're dealing with here. So, again, it can be really quite stock specific indeed and bear in mind your trading can be more difficult, your best prices can be quite difficult to get and be wary of settlement issues as well. So, there's a lot of risks there.
I prefer to try and go through developing nations with individual areas of passives where I can to get myself a decent tracker on it. But be wary these can be astonishingly unreliable indeed. In many ways with the emerging markets, I like investing in the effect of the emerging market or developing market: think ‘what does that country need?’ and then go back to the base. A classic one is China, for example—whose domestic markets I wouldn't trust at all, Hong Kong is fine but the other ones internally I certainly wouldn't, I think they bare more resemblance to a day at Ladbrokes rather than anything else. But look at what China needs; the current themes through the supply of drugs, supply of medical and other cleaning equipments, or the likes of Unilever, all those sort of areas. But be wary: the theme that has been there for the past few years of buying top-end luxury goods...what was there before, if China's slowing down, which we believe it is, then those same consumers will also be feeling the pinch with it and so they'll be sitting there saying ‘I think we'll trade down a bit’, and a good reflection of that has been most recently the figures from Burberry.
Cook: So, another hot topic that investors have really been flowing their money into at a huge rate is the bond market, specifically corporate bond and high yield. From an income perspective, are you more interested in the sort of corporate bond story or would you still be sticking with your dividend payers?
Urquhart Stewart: Well corporate bonds, and you have to look at what's happening with corporate bonds at the moment, you've actually got a relatively low level of failure rate on these, in fact the market is pricing at a much higher rate of default rate which isn't currently there. Mind you, the price has already been driven up, very significantly already, but one of the things whether you're looking at dividend income or whether you're looking at yield of bonds, one of the longer term drivers for successful investing is that compounding of those returns. Just remember, if I can recall the Barclays Capital figures: GPB 100 in the UK market over 67 years gets you to about GBP 7,000. If you invested all the dividends during that time it’s a GBP 132,000. Now, OK, 67 years and we are talking with relatively small sums of money, but nonetheless the difference is really quite significant indeed.
So, I do like those corporate yields but they have been chased an awful long way already. But for me, in terms of income, I like a combination of the corporate yield off my bond and also those dividend stocks, but they are priced at the movement already for that. So I am rather wary about deploying any more for that for the time beginning.
Cook: So, from income payers to something that doesn't pay an income, what about commodities, specifically gold. What would be your outlook for that over the next year or so?
Urquhart Stewart: I have never been a fan of gold, because the trouble is it doesn't do anything. You can stroke it, you can cuddle it, you can actually have a little girl teddy bear and put it on the pillow next to you and so it can keep you warm at night, but it doesn't do anything else. Yes, of course, people will sit there and say it's given you a great return, but it depends on the time schedule you are actually look at. In the shorter term yes, longer term no it hasn’t. So it’s not anything to me which does anything else other than just goes up and down. Where it is at the movement, am I going to get a 10%, 20%, 30% return on a consistent basis? No I am not.
Other mining companies, and minerals themselves, I'm more interested in when I am actually looking at the usage of them. But again if you are seeing your primary demand for minerals say coming out of China slowing down then it would be silly to actually follow that one down. Having said that, as it does go down, those companies aren't going to disappear any time soon, that will be an opportunity if that's one of your specialist areas to follow to actually buy at a time when you think everyone else has left the market.
Holly Cook does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.