MAY 2012 Global view has the edge
Economic analysis is a vital part of Neptune’s investment approach, which focuses on identifying global sectors with the greatest potential and the best companies within them.
JAMES DOWEY Chief economist, Neptune Investment Management
Neptune Investment Management has long differentiated itself through its focus on identifying strong global sec- tors, rather than taking a geographic, benchmark-driven approach. At any one time, the investment team will combine to uncover the global sectors with the strongest potential, then the strongest compa- nies within those sectors. Economic analysis is a vital input in building a picture of the global economy and its opportunities.
James Dowey, chief economist at Neptune, says: “We have taken a con- scious decision to look at asset alloca- tion by sector rather than by country. We believe companies are now operat- ing globally, even compared to 10 years ago.
“It makes sense to have money in those companies that are the best, and disregard extraneous considerations such as where they file their accounts, or where their head office is situated. We look at where demand is coming from, or on individual strength. For example, if growth in India is very strong, we want companies that are tapped into that economy.”
Dowey’s role as economist at the group is to provide a pragmatic view of economic growth that can be tied into sector and corporate analysis. “We believe you can’t look at economic growth as a mechanical process. There is an array of ingredients that matter for economists that can’t be quantified – such as political events.”
At the heart of his analysis is the view there are core factors that can be measured – demographics, for example, or historical productivity rates. Math- ematical models can be built to take these into account. However, building a view on political events will always be more of an art than a science. Neptune has 28 people in the invest- ment team and with the exception of chief executive Robin Geffen, Dowey and head of research Chris Taylor, each member is responsible for researching a global industry sector. The investment team meets two or
three times a week to share research. Many of the meetings focus on indi- vidual sectors.
Dowey gives the example of global retail, which will incorporate an examination of everything from Louis Vuitton to supermarket chains in India. He says: “The feedback will go both ways. We want to know what fund managers are hearing from com- panies, particularly if it is a sector that is significant to a country’s economy. We are making sure we look at things from every possible perspective.” He also points to India. The country has structural growth dynamics and is growing at about 8%. Dowey will also examine the influences on cyclical dynamics, such as central bank policy. He points out that politics have been a huge constraint on growth in India – the economy has progressed ahead of the political system.
In assessing the strongest sectors and growth opportunities, it is there- fore important to understand the poli- tics, macroeconomic and corporate perspective.
He adds: “They all inter-link – for example, the Indian government is quite protective of its retail sector. If you go to a mall in Delhi, there are a few global brands, but most are local. “This could present significant opportunities for Western firms in the longer term.”
The recognition that the fate of each region is inter-linked has been particularly important in identifying opportunities in the global economy over the past few years.
Dowey says: “Looking at last year, for example, emerging economies did well and continued their recovery. They responded quickly to rising infla- tion in an orthodox and commendable way by raising interest rates. Growth was generated in spite of that. Yet these markets under-performed.” Neptune’s portfolios have tended to have long-term structural overweight positions in emerging markets. Dowey still believes there is likely to be secu- lar growth across most emerging mar- kets and that companies and sectors with exposure will tend to outperform. He points to tentative signs of improve- ment in China, with early indications of a soft landing. Monetary policy is being loosened across emerging mar- kets, which should provide a boost. Equally, the US is making progress.
The employment situation is improv- ing and has been since the middle of last year. Growth rates of 2-2.5% are being recorded on a regular basis. President Barak Obama is likely to be re-elected, which should be a good thing for the economy.
However, Dowey is under no illu- sions about the weakness of the euro- zone. He believes there is a question over the continuance of the euro, therefore the outcome for those coun- tries dependent on its fate. The solu- tion has been too focused on austerity and there has been widespread rebel- lion against the measures.
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He says it is clear the current plan in Europe will not work. There has to be a change of plan and that is only likely to come about when it has been preceded by sufficient market turmoil. However, he believes that in the event the euro breaks up, the long- term refinancing operation has bro- ken the link between the eurozone crisis and the rest of the world. He says: “In December, the Euro- pean Central Bank said it would help the European banks come what may, severing the link between what is going on in Europe and what is going on in the rest of the world. Year to date we have seen the Spanish stock mar- ket fall 15%, while the S&P was up around 9%.
We believe that you can’t look at
economic growth as a mechanical process. There is an array of
ingredients that matter for economists that can’t be quantified – such as
political events
“This would have been impossible in the second half of last year because the global economy was so tightly wound with the rest of the world via the European banks.”
Dowey believes the outlook for the global economy is good. He recognises there was a similar early strength last year before it became toxic at the end of the year, but believes much of this weakness was the impact of inflation. The emerging world was forced to raise interest rates and the markets reacted against this tightening, because of its potential impact on con- sumer income and spending. He concludes: “Now, inflation is falling, not in a straight line but then that would always be unlikely. It looks like last year but you need to pick and choose where to invest.
“Our latest overweight position in our global fund is the US, the largest in its history.
“We also believe that investors can- not afford to ignore the potential growth of emerging markets.”
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