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Neptune's Burnett positions for third-quarter market rally
Rob Burnett loads up on consumer discretionary, energy, industrial and materials stocks, anticipating a global growth rebound in the next three to six months.
Burnett's view is shaped by a belief that with the exception of Italy, the eurozone's austerity programme is starting to work, and he expects a conclusion to the debt crisis in two years' time.
He also believes that a lower oil price and coordinated rate cuts across emerging markets will boost global growth, while the effect of cheaper fuel prices in the US will add billions to the US consumer's spending power.
In a conference call to investors, Burnett said that after a difficult first quarter the fund has been steadily clawing back performance. The fund has had a difficult 2012 and is so far around 4% behind its benchmark. But Burnett is 'very optimistic' that he will be able to beat the market in the coming months and the fund continues to be a key pick in Citywire Selection.
Debt a 'side issue' for Europe
Burnett believes that debt was merely a side issue compared with the lack of competitiveness that slow growth was engendering.
'Sovereign bond pressure will persist until competitiveness is achieved. The lack of competitiveness is making debt levels unsupportable because countries cannot grow. So by reducing unit labour costs they become more competitive and it allows them to sustain higher debt levels,' he said.
He cited Ireland as the most effective country so far in reducing its unit labour costs, and said that both Spain and Portugal were making strides to get there in the next two years. However, he singled out Italy as the exception, in that it has yet to impose any meaningful reduction. 'I think the sovereign debt crisis could end in two years, but Italy is the wild card,' he said.
Increasing industrials, energy and consumer discretionary
Burnett expects to see an economic upturn in the third quarter which should release value opportunities, and because of this has been selling down his holdings in consumer staples. At the same time he has been steadily increasing his weighting to consumer discretionary, energy, industrial and materials – sectors that should do well if the global economy picks up. These are all areas he thinks look compelling.
Burnett agrees with Cazenove European manager Chris Rice that in the third quarter secure growth stocks are likely to underperform, and the dynamic in the market will change. 'It will not be a dash to trash, but a move to high quality cyclical stocks,' he said, referring to stocks that move in line with the broader markets.
He has screened analyst estimates and found a consensus view around popular names that have held up strongly. This has made him sell secure growth stocks that have hit their target prices such as tobacco group Swedish Match and health care product specialist Coloplast.
As a result he has moved into undervalued areas that have lagged, such as agricultural products specialist Yara and chemicals firm Lanxess.
Agriculture overweight remains
The fund's strategic overweight to agriculture remains as Burnett believes high grain prices are here to stay, and both Yarra and Syngenta are key overweight positions. He also owns their two US rivals CF Industries and tractor manufacturer Agco.
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