Self-declared contrarian investor Tom Becket, chief investment officer at PSigma, says now is the time to put confidence in emerging markets (EM).
‘Overall, we should have seen a bigger correction in equity markets over the last month but a line has been drawn under that correction and markets are now probably propped up by M&A activity and further M&A potential.
‘So a lot of investors are making the mistake of translating an improving economic backdrop into positive future stock market returns. While we think there are some pockets of real value around the world, I believe most equity markets appear to be about the right price.’
In the firm’s balanced portfolio equity allocation, which has recently tilted back to a neutral position, Becket has a 7.5% exposure to North Asian value markets, particularly in China, through core positions in the Allianz China Equity and BlackRock’s Asian Growth Leaders funds.
‘Emerging market (EM) valuations are now cheap and the cheapest among them are the markets like China, Hong Kong, Korea and potentially Taiwan. We’re backing ourselves with conviction there, and the more people get bearish on China and the rest of the EM, the more interesting it gets.’
He said the next move would be to go overweight EM and put more emphasis behind the North-Asian value trade, but acknowledges his allocation to Chinese equities has been a drag over the last year.
Over the last 12 months, the model is up 4.82%, compared to the ARC Sterling Balanced Asset PCI benchmark, which rose 3.17%. Over three years the portfolio delivered 17.28% versus 14.59% by the index.
Performance was driven by Becket’s structural overweight to European equities in the second half of 2013, which he has kept but refined towards peripheral European markets with an increased focus on financials.
In a typical contrarian slant, Becket remains committed towards his hedged Japanese equity play, which he also holds to access global growth ‘at the right price’.
‘We think people are missing the point in regards to Japanese equities, because they are focusing far too much on the currency while missing the point that Japanese companies are in a fundamentally sound position where earnings potential is very high, particularly as the economy continues to recover.’
Profits were further bolstered by segregated mandates run for PSigma, including the City Financial high yield opportunities fund and TwentyFour Asset Management’s European corporate credit and an asset-backed income fund.
City Financial’s mandate invests in stressed and distressed European credit markets, where Becket sees a ‘one-off opportunity’ to exploit the European Central Bank’s asset quality review, which is expected to force European financial institutions to clean up their balance sheets.
The TwentyFour fund focusing on targeted duration European corporate credit with a fixed life, ending in 2017, has an attractive 6.3% yield. Meanwhile, the TwentyFour asset-backed Income fund is up 27% since inception in January last year.
‘Those types of credit are trading with a high recovery potential that we think should normalise in an improved European economic environment. I can quite easily see 10% annual returns from that fund.’
Performance was also bolstered by the US Select High Yield fund, which sits in the portfolio’s higher corporate credit allocation, and invests in US small cap high yield debt delivering a 8% yield.
‘It’s a niche market, but it operates in the sorts of markets the other big funds like Invesco Perpetual just can’t operate in because the bonds are too small.’
In alternatives, Becket stresses the recovery potential of mining, energy and gold companies. ‘They are now focusing on shareholder returns and strong balance sheets, while paying income back to unit holders.’
Over the last year, this exposure hasn’t been helpful, with energy shares in the Investec Enhanced Resources fund particularly dampening.
The balanced portfolio currently has high cash levels, in a more defensive and opportunistic approach.
‘We’re retaining higher than usual cash to find better opportunities when markets correct at some point. From a new idea generation perspective, we’ve never had fewer ideas than today.’
Japanese equities: ‘Investors are missing the point about Abenomics and focusing too much on the currency and less on corporate positives’
Emerging market equities: ‘Emerging markets remain the long-term growth opportunity
of our careers’
US high yield credit: ‘We’ve got to the point where investors are no longer compensated for the risks. Stick with some high yield but be extremely selective’