Bruno Vanier is the Paris-based CIO for equities and convertibles at Edmond de Rothschild Asset Management. Vanier expects the global economy to remain very weak this year, but expects a pick-up in sentiment for global equities some time during the fourth quarter or the first quarter of 2010. He spoke with AsianInvestor recently about his views on global equities and why he likes stocks such as BMW, Microsoft, Chalco and HXEx.
How should investors be allocating their global equity portfolio, given the current environment?
Vanier: We don't have strong views as of now. If anything, we like European stocks which would be good plays on the US recovery. We tend to be a bit more cautious on the US. We like emerging markets, in particular China. But this is a function of a bottom-up approach. You always find pros and cons in each market. The idea is to try to make as much money in each market.
Whether investors should be aggressive or not, of course not. We still have a substantial part of our portfolio invested in defensive stocks. The whole idea of this year is to switch from this defensive strategy to an aggressive strategy. Whether we should do this now, no. Whether we should wait until year-end to do it, no. When should we do it? Very slowly over the next six to nine months to be roughly positioned more aggressively in the fourth quarter.
We have been through something absolutely drastic in terms of stock market performance and now in terms of economic recession.
What are your expectations for the global economy and global equities this year?
Our base scenario is we should start to recover beginning the end of this year up to the start of next year. What are the reasons for that? First, the base effect. The contraction of activity now is so drastic. Second, there is an oil countershock, with the price having come down so much from July, this should be a strong incentive going into the second half of this year. Last but not least, all the measures taken across the world whether in China, the US, Europe, they should work at some stage. That's money going to be spent by the government which will replace money spent by US consumers who don't consume anymore.
That's the general economic scenario. There are many other scenarios, more pessimistic than this one, such as going for a very long deleveraging of the US consumer, no consumption for a number of years, and government spending not being enough to replace that consumption.
We cannot have a strong view on the stock market right now. We want to buy on dips. We don't want to be too aggressive this year, not until the end of the year. We don't want to go from position A of being defensive to position B of being aggressive in too quick a way.
Are you buying on dips of share prices of companies you already own?
Yes, and also a bit of switching to visible high-yield stocks and value cyclical stocks. The move is to increase this at the expense of cash over the course of the year. That's our position, to reduce our cash position to be a bit more aggressive and then maybe later to switch some more.
You don't want to buy the worst performing stocks of last year just because it has come down substantially. In many cases, there is good reason why those stocks' share prices came down. What you want are companies that will survive the cycle and better yet, be the winners in the next cycle. You have to be really picky. Typically, you would have done this is 2001 to 2002, you would have taken the same approach. If you bought companies that declined a lot then, like internet stocks, then after two years, you would have made no money or even lost money.
What are some examples of these cyclical companies that will survive the crisis?
BMW. It has a fairly strong financial position. The company will survive. BMW has come through various numbers of cycles and every time they can stronger. BMW is very advanced in low-emission engines. If you buy a BMW 300 5 series, the gas you would be consuming now would be the same as what you consumed in very small car like Renault of a Fiat five years ago. BMW's research on engine efficiency has been one of the best. R&D budget in terms of absolute amount is one of the biggest in the industry. The car industry is in an absolute nightmare right now. GM has a problem. Toyota is losing a lot of money now. BMW is definitely hit now. But this will change for BMW next year. You have the chance to buy the brand from below book value.
Microsoft. It has been typically hit by very bad demand. But the company is very strong financially and operationally. They just came with their results a few weeks ago, which were very bad and even more cautious on guidance. Microsoft fired people (in multiples) for the first time ever. The situation is bad but in 2009 and 2010, we are sure the company will be there.
Chalco (Aluminum Corporation of China Limited) is a cyclical stock and the aluminium business is very profitable. It is trading at very cheap valuation. We increased our exposure to non-ferrous metals since December. The company is morphing gradually into an upstream resource play. The parent has very strong financials. It's sort of like a recovery play. The more typical longer term choice would be China Telecom, China Mobile.
HKEx (Hong Kong Exchanges and Clearing) is cash rich. It is operating at a fixed cost. It is very leveraged to trading activity in Hong Kong. This year, you don't need to wait for them to produce. It's a bit early and the stock market is volatile. You need to accept this volatility in the short-term.
How do you choose the companies to include in your global equities portfolio?
First, the company will survive and we determine this through a number of measures. Second, the company must have gone through a difficult time before. A company that has been through a difficult time tends to be much less over optimistic. Third, with valuations you have to be careful. Don't value in terms of price-to-earnings ratio because it doesn't make sense. Typically you want to buy something that makes a loss. From a valuation point of view, you might look at total market capitalization and its long term ability to produce cash flow.