Stock picking in a world of uncertainty
Investors looking to protect their savings and generate a return on them have to make investment decisions in an environment increasingly dominated by significant and potentially destabilising economic issues.
The eurozone crisis is the most obvious example but the instability of financial institutions, the economic slowdown in China, the wider sovereign debt issues and political stalemate in the US are all additional concerns occupying headlines in the investment community.
Government and Central Bank policy responses to these problems have had significant impacts on markets, economies and asset prices. However, these policy responses have often been reactive rather than proactive, lacking in structure and vision, and making them unpredictable.
At times they have also been unprecedented in living memory: for instance, the recent money creation or quantitative easing policies employed by the US Federal Reserve and the Bank of England.
The long-term consequences of these actions are hard to predict and in part are highly dependent on future policy steps, which will be influenced by democratic feedback from voters.
These responses and uncertain consequences further increase the challenges for investors attempting to protect the real value of savings and generate returns. Yet despite the uncertainty, three related themes remain persistent in the global economy and these are of great significance to investors.
First, and perhaps rather obviously, most real economic activity will continue. Although growth rates may well be impacted for some time and significant uncertainties exist, barring some major physical catastrophe most economic activity is relatively persistent. The world has significant incentive to continue the consumption and provision of goods and services that are beneficial to our quality of life.
No matter what happens, we still need to eat, so agricultural production, the food supply chain, food retailing and all the employment, investment and services that support this will still be required no matter what the political and economic uncertainty.
The world economy still has significant potential to grow. Taking the three underlying components of growth – population growth, productivity improvements and physical capital formation – from a global perspective (rather than a European one) there is still significant potential.
In part this is driven by increasing participation of nearly two billion people from China, India, Brazil and other countries in the global capitalist system. Given the improvement in living standards that this has delivered to hundreds of millions of people, it is unlikely that this trend will reverse. For example, Yum! Brands, the owner of the KFC restaurants has opened 3,000 KFC restaurants in China in the last 10 years alone.
The third theme is that even during difficult economic times, innovation and new competition is a persistent feature of free enterprise whether it involves products, services or business models. Information technology is currently a key source of innovation. The recent emergence of smartphones and other mobile devices is a good example of this.
Five years ago the iPad did not exist, now iPad sales generate over $30 billion in annual revenue for Apple. This is more than the entire global revenue of Heineken.
While we are in an environment of political and economic uncertainty in Europe, it is worth remembering that most economic activity will continue, there is still significant growth potentially globally and corporates will continue to innovate and compete.
Consequently, one opportunity for investors – as part of a balanced approach – is to invest in equities in these areas of global growth and innovation.
This article should not be interpreted as investment advice. VFM is licensed to provide investment services in Malta by the MFSA. The Vilhena Funds SICAV plc is licensed by the MFSA and qualifies as a UCITS. J O Hambro Investment Management Ltd is authorised and regulated by the FSA.
Mr Rutter is fund manager, Vilhena Global Themed Fund, JO Hambro Investment Management.