Tigue favours Asia and emerging equities

Jeremy Tigue, manager of the giant £2.5 billion Foreign & Colonial Investment Trust PLC, has set out his views on where markets are heading for 2007, as well as the key risks.

Tigue, whose trust was the first ever such investment vehicle and is widely held by many thousands of private investors as a popular choice in savings schemes, believes that Asia and emerging markets will be the best areas to be overweight in 2007, despite expectations of slowing global growth.

"2006 was without doubt an excellent year for markets and this has helped propel the Foreign & Colonial Investment Trust share price tantalisingly close to its all-time high of 288 pence," said Tigue.

"Our expectation is that 2007 will see slower economic growth, a reduction of inflationary pressures and lower interest rates in the US with perhaps one more rate rise in the UK and Eurozone. This benign backdrop should be good news for equities worldwide and ensure a continuation of the abundant liquidity which has been supporting stock markets. In other words we expect 'more of the same' in terms of buoyant levels of mergers and acquisitions activity fuelled both by companies seeking to expand though transactions and deals prompted by private equity funds which are awash with record levels of cash."

Tigue believes that mega deals will be a feature of the market in 2007, thereby raising the prospect of attention starting to shift away from mid caps after years of strong performance in favour of large cap stocks which have lagged for sometime. He points out that this scenario would benefit the Foreign & Colonial Investment Trust which, given its size and cautious style, has a blue-chip bias in developed markets.

"However, the principal risk to this rather benign scenario is a more pronounced fall in US house prices than the market anticipates combined with a rebound in oil prices above the $80 a barrel level. We feel this is unlikely but it would clearly unsettle investors and when that happens markets tend to overreact," said Tigue.

"A key investment question in our mind is therefore is whether the US will start to perform better once the interest rate cycle has peaked and of course the direction of the dollar."

Tigue argues that while everyone expects the US dollar to weaken further in 2007, it may be more against Asian currencies and not against the pound and the Euro.

"It may therefore be time to lock in to the current sterling / dollar exchange rate," commented Tigue.

"In summary, we expect to see volatility rise in 2007 from low levels in 2006 with both risks and opportunities likely to emanate from the US. Given strong local fundamentals and our expectation that the dollar will weaken against Asian currencies, we are standing by our existing overweight position in Asia and emerging equities," he concluded.