Tigue spies emerging danger in 2010
The fund manager of one of the UK's most widely held investment vehicles, the 141-year-old Foreign & Colonial Investment Trust, anticipates that a ‘blow-up' emanating from emerging markets could be a possible shock for investors in 2010.
Speaking at a briefing in London today, fund manager Jeremy Tigue warned of the risks from a major currency dislocation, most likely between China and the US dollar, causing upheaval in the coming year.
Tigue commented: "China is obviously the most important developing nation but concerns linger over their exchange rate. Do they let this go up against the dollar - impacting their domestic economy - or carry on with their current policy of keeping the exchange rate low - thus exporting deflation to the rest of the world and contributing to global economic problems?"
Tigue argues that, regardless of whether this will have a negative or positive impact over the long-term, a change in policy by Chinese authorities could be the catalyst for a market correction. China currently holds significant exposure to US Treasury bonds; a decision to ditch this policy could spark rate rises in the US and derail economic recovery in the developed markets.
Notwithstanding the risks of a market correction, Tigue believes the fundamental growth prospects for emerging markets remain stronger than the developed economies, where growth could be anaemic for some time.
However, on a valuation basis, Tigue points out that emerging markets command a premium to developed economies and that it may be harder for investors in 2010 and subsequent years to repeat the extremely high level returns seen in recent years.
Large-caps, defensives and healthcare tipped for developed markets
Turning to the developed markets, Tigue pointed out that UK mid-caps have been a ‘sweet spot' in equities over the last 10 years, returning 110% versus large and small company returns during the same timescale of 13% and 31% respectively. He anticipates that the trend will likely swing back to the very large companies by the end of 2010.
Tigue believes one interesting theme to look out for in 2010 will be whether the ‘dash for trash' that has been so prevalent in the last 6-7 months ends and investors return to defensives and healthcare stocks, which are both very cheap on an historic basis. The latter, particularly pharmaceutical companies, have been driven down in price whilst investors remain nervous over the future of drug prices, following the steps proposed by the Obama administration to alter healthcare provision. Once legislation is passed and there is greater clarity, they should look more attractive.
Tigue concluded: "The main message we can take from the last 12 months is that if equities look cheap by historic standards then investors are right to buy them - as anyone who invested at the bottom of the market can attest. Bull markets tend to begin when people are at their most pessimistic and gradually markets begin to recover. Investors do not need to worry again until optimism reigns; however, we are many years away from this situation. In the meantime, shares will grind slowly higher rather than shoot up over the next few years."