Lucy MacDonald of RCM reveals her outlook for global equities in 2011, including the main opportunities and risks, and also explains how investors can position their portfolios accordingly.
Date: Jan 2011
Tags: Equities, Inflation, Growth, Debt, Asset allocation, Portfolio construction
Outlook for equities in 2011
According to Lucy MacDonald in an interview, RCM is optimistic for the equity markets in 2011, partly because the fund manager is expecting liquidity to remain fairly supportive.Also, in terms of growth, although slowing, she said it is expected to still be positive, plus valuations are particularly attractive at current low interest rate levels against most other asset classes, she added.
MacDonald said this all leads to a relatively favourable environment for equities.
The concerns, however, are a combination of deflation on the one hand, and inflation on the other.
In more mature economies, she explained, there are some elements of deflation, for example in Japan and some parts of peripheral Europe, and to a certain extent in the US.
On the flipside, in the emerging economies, there is some inflationary pressure. This is especially the case in China, with food prices and wages rising, and also in Brazil, said MacDonald. To some extent, this is exacerbated by the under-investment in infrastructure in some emerging markets.
In addition, there are risks surrounding sovereign debt in Europe, she added, along with political and geo-political risks across the world, especially since some governments have been weakened as a result of the crisis in 2008.
Positioning portfolios
According to MacDonald, to profit from such an environment requires a portfolio of companies which have got good organic growth – to benefit either from the industry they are in, which has structural growth opportunities, or from their region.
Whatever happens within the wider, uncertain economic environment, those companies should be able to outperform, she explained.
A second area to focus on, said MacDonald, is companies which have managed to benefit from the crisis and downturn to pick up some assets and restructure themselves.
Thirdly, she added, portfolios should focus on companies which are benefiting from corporate spending – for example on advertising, IT spending or small-scale capex.
And finally, companies which can benefit from those consumers with strong balance sheets are also attractive to MacDonald – either those in emerging markets or those selling to emerging markets.
Other opportunities and risks
One area which MacDonald said RCM is spending a lot of time focusing on at the moment is related to data storage, cloud computing and servers.
This is where the firm has done a lot of work with consultants, she explained, with storage looking like an area which has two to three years more to run until supply catches up with demand.
Key to this attraction is the fact that companies can use these services to cut their costs, therefore making it of particular interest in the current environment.
On the downside, however, MacDonald said RCM is still underweight the financial sector. So although there are restructuring opportunities and those companies which have survived are still relatively sound investments – being lowly-valued with good dividend yields – overall there is still a lot of uncertainty and risk related to regulation.
The myriad of new rules and regulations being brought forward in the US and Europe creates a lot of uncertainty for equity investors in this sector, she explained.
Not only does it take up a lot of management time – it also creates uncertainty around the valuations and end-returns for the firm, as well as the amount of capital that firms will need.
According to MacDonald, such issues might mean that stocks in the financial sector will remain at relatively low valuations.
