Guy Monson, chief executive officer of Sarasin & Partners, has argued that the combination of quantitative easing (QE) in Europe and structural reforms in emerging markets is reversing his negative stance on the latter.
Although the US is winding down its own programme of QE, Monson (pictured) doubts that that is the end of the story. ‘I think QE is here to stay and as a consequence this extraordinary bull run in real assets has some way left to run.’
Yet rather than being Fed driven, Monson supposes that the next phase of the rally could be spurred by the European Central Bank – especially with stubbornly low inflation in the continent and longstanding hawks such as Bundesbank president Jens Weidmann softening their tone. ‘It is highly likely the Europeans will be the next to embark on quantitative easing,’ Monson claimed.
For Monson, the clear investment implication is to remain in real assets like equities rather than artificially suppressed bonds. He relays that in its portfolios Sarasin has taken its fixed-income weightings down to the lowest levels permitted by their mandates.
Monson acknowledges, however, that simply piling into any and all shares is inadvisable. ‘If you run this policy of QE, you will create bubbles.’ He identifies three at the moment: credit, classic US growth stocks, and London real estate.
Monson’s current approach is therefore to ‘stick in equities, but give them a value tilt’. This runs somewhat counter to recent history, when value has lagged significantly. ‘You just haven’t had to worry about valuations for five years,’ Monson accepted. At first they were rendered irrelevant by plunging prices, and latterly by escalating earnings.
Now two ‘obvious opportunities’ in value stand out for him. The first is global equity income, where he spies a ‘wonderful arbitrage’ in switching out of credit. He warns in particular of the latter’s deteriorating quality, with the return of covenant-light bonds, and simultaneous yield compression. In contrast he highlights the ‘astonishing cash flow story’ in equity income, affording ample scope for higher dividends.
His second area of interest is emerging markets. Monson has been negative on emerging markets for three years, decrying their underperformance during that period as ‘entirely justified’ because of poor corporate governance, irregular dividends and rising labour costs through the regions.
‘We were iconic believers in buying the new world through the old world,’ he commented. ‘But I think that strategy has become a little tired.’ In particular Monson worries the Western conglomerates tapping emerging markets for growth are ‘now showing some of the capital indiscipline’ that used to plague local firms.
Monson advocates a simple ‘cut and paste strategy’ when returning to emerging markets. ‘In emerging markets, you don’t have to be a hero. You just have to buy the relatively lowly valued blue-chips.’ With that in mind, he likes Chinese state-owned enterprises such as banks and China Mobile and Indian exporters and financials.
Domestic reforms should help both – with China expected to liberalise interest rates and India’s politics and central bank moving in an ‘overtly’ pro-business direction – as should European QE.
‘I bet a lot of that liquidity will flow into emerging markets,’ Monson said. ‘There is a lot of footloose capital in global equity markets.’ He recalled the flight from Europe in 2011 and subsequent return last year as evidence of the effect such flows could have on markets.