Sell US, buy Japan and Europe: Australian Ethical

Australian Ethical Investment cuts its US exposure by 27% on a hunch that improved manufacturing conditions and positive cargo movements in Europe and Japan will reap returns.
Sell US, buy Japan and Europe: Australian Ethical

Falling unemployment in Japan and an increase in European air cargo traffic have prompted Nathan Lim, portfolio manager at Australian Ethical Investment, to reduce its US holdings and boost exposure to Japan and the EU.

Lim has been adjusting the fund’s holdings for the past three months, reflecting a house view that the global economic recovery will no longer be led by China and the US. It has cut US exposure from 44% to 32% and invested more in Japan and Europe.

“For us, the best indicator of future growth is the Purchasing Manager’s Index [PMI], which tells you whether manufacturing is expanding or contracting,” says Lim.

The PMI index is currently 54 for Europe and 56.6 for Japan. (Readings above 50 indicate an expansion in manufacturing, while readings below 50 show contraction.)

“Twelve months ago these markets were contracting, with PMIs of around 48,” says Lim. “Now the figures are not only strong, but trending in the right direction.”

It’s the opposite story in the US, where the index has dropped from about 56 in September to 53 now – and it is trending lower, says Lim.

Australian Ethical has A$842 million in assets under management across three funds: Australian large-cap, Australian small-cap and an international trust. They invest in energy stocks, but only those with a socially responsible focus, such as solar farms, wind turbine manufacturers, LED lighting companies and makers of chemical-free cleaning equipment.

Lim manages the international trust, which has A$125 million in assets. Since making the tactical switch, the fund is invested 23% in Asia Pacific (including 19% in Japan), 35% in North America (mostly the US), and 38% in western Europe (including 13% in Germany and 8% in the UK).

The firm has held a long bias towards the US since 2011, but now feels the seat of global economic growth is moving away from China and the US.

“Evidence of a wider recovery in the Japanese and European markets is not always clear-cut, so we don’t rely on government statistics and investment bank projections,” explains Lim.

“We focus closely on the PMI but we also count things like containers out of ports and railcar movements. Likewise, a boost in air cargo traffic, which is the most expensive way to move goods, can be a clear sign that conditions are improving.”

Indicators like these are also timely, argues Lim. “US railcar numbers are released every week and global port numbers are published every month, so we don’t need to wait for quarterly GDP figures to be released to get a feel for what’s happening.”

In Japan, Lim also watches unemployment. “In an absolute sense, Japan has never really had an unemployment problem, but conditions there are tightening,” he says. “Unemployment has dropped from 4.3% a year ago to 3.6% now, and the absolute number of people holding jobs is on the rise. These are long-term secular trends that give us a lot of confidence.”

Lim says finding efficiency-focused energy companies in Europe and Japan is easy. “There is a big focus on R&D in these markets, where companies are not only more progressive, but have a technological edge,” adds Lim.

In the 12 months to the end of February, Australian Ethical International Trust was up 52% as against 49.6% for the benchmark MSCI Global Climate index. On a two-year compound annual growth rate basis, the fund is up 29.7% compared to the benchmark 29.2%.


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