Investors hunting for 'Switzerland'
Investors are scrambling for safety as geopolitical tensions fuel the hunt for investable countries and ideas, says Fidelity’s global portfolio manager Amit Lodha.
Glenn Freeman: In this edition of "How We Invest Your Money?" I'm speaking to Amit Lodha, the Global Equities Portfolio Manager with Fidelity International.
Amit, thanks very much for your time today.
Amit Lodha: Thank you, Glenn.
Freeman: Now, we're speaking about global equities funds. But it was quite interesting. In the chat that we've had just before here, you mentioned the interplay between fixed income and how that is something that you think about quite early on in the discussion of the equities market at the moment.
Lodha: Yeah. One of the things I get asked by a lot of investors is, where are the risks, and what are you focused on in terms of the risk. And I think most people know the geopolitics and all the other tweet risks that we see every day. For me, the risk that I'm most focused on is the fixed income markets. And if I look at, in addition to my process over the last five years, it'd be working much more closely with our fixed income fund managers, because the evolution of interest rates has such a big impact on portfolios and how we think about companies, how we think about discounting future cash flows, I think it's become very important to my investing. So, the reason I say that the big risk is really going to lie in the fixed income markets is, 25 per cent of sovereign bonds globally are negative yielding, which is meant that my fixed income colleagues are really chasing yield. They're going for corporate bonds, high yield bonds. And I've actually seen some fixed income portfolios actually buying equities because you have this search for yield which is a really interesting dynamic.
If you look at markets at this point of time, just as an observation, where we in the equity markets are very defensively positioned. If you look at the sectors which have been doing really well, it's been consumer staples, REITs, healthcare, the defensive sectors. Whereas if I look at my fixed income colleagues, they've been buying the highest level of equities, which gives them the most amount of yield on a fixed income perspective. So, fixed income, which was supposed to be defensive, is going on the high yield, high risk perspective. And equities, which is supposed to be your aggression is going and positioning portfolios very defensively. So, I think that's really interesting.
Freeman: So, that's another part of that sort of the correlation between fixed income and equities is something like turned on its head.
Lodha: Absolutely.
Freeman: Being sector agnostic or country agnostic is something that's often an intrinsic part of fund managers' approach. What are some of your thoughts on, say, Europe, for instance, at the moment?
Lodha: Yeah, I think that's a very interesting question, which one can answer, taking a very short-term view, or one can answer from a really longer-term view. We should take a slightly longer-term view. This decade has really been about the US It's been about technology and it's been about the US The decade prior though, was all about China and emerging markets. If you look at the largest companies in 2009, it was all the commodity manufacturers, BHP, Rio, Exxon, GEs, these were the largest companies in the world. Fast forward today, end of this decade, you will see that Apple, Amazon, Microsoft, Facebook, the top 10 are only technology companies. So, this has been the decade of the technology companies.
So, if you fast forward to the next decade, and when we think about what would be the largest companies in 2029, where will they come from? My view is that the US has been a big important market for us for most of the last 10 years. Valuations in the US are pretty high compared to valuations in Europe. In fact, if you look at growth, you can buy emerging market growth much cheaper than you can buy US growth. So, I think there's some interesting opportunities that you can find in emerging markets, in European markets. If you're prepared to look outside the technology sector in the US and look around you, there are some really interesting companies around the world.
The one last point I'd make is that I think politics and geopolitics and geopolitical uncertainty will only rise over the next three to five years. You look at what's happening in the elections in the U.K., with the rise of labor and socialism under Jeremy Corbyn; you look at what's going on in all parts of the world whether you look at Hong Kong, whether you look at Chile or the angst against inequalities. One statement I'd make is that I think country selection has not been important for the last 10 years. I think it will be a lot more important over the next 10 years. Because we'll really need to seek out the Switzerland's, if you like, which are not impacted by these and that is where capitalism and that is where capital will flow and that is where money will flow.
Freeman: That's a really interesting way to put it to seek out the Switzerland's. But I want to zero in on one of the comments you just mentioned there about a tripolar world. What do you mean there?
Lodha: So, I look at the internet sector, and we already have a bipolar world there. I think people may not realise but the technology sector, especially the internet sector, in China and in the US and the Western world are completely different. Chinese internet players like Alibaba and Tencent, which are giants in China are not available outside China, especially in the Western world. Similarly, Facebook, Google, Amazon, our tech mammoths, are not available in China. So, we already have a bipolar world in China and in the Western world ex-China in terms of how the internet sector looks like.
This, I think is the early read on how the world might progress if protectionism continues to be the focus area, if the US surely wants to continue to – I mean, trade is a war. I think tech is where the battle is. And technological superiority is where the battle is. And so, that, I think, is not going away anytime soon. So, I expect the world to really morph into maybe three areas. You'll have the US and you'll have the Western world which wants to align with the US but also stay nonaligned. So, I put Europe in that camp. And the way you should think about it is, look at the countries which are okay using Huawei and the countries which are not okay using Huawei. So, Australia, for example, is a country which has said that they don't want to use Huawei.
So, the world therefore gets divided up, if you like, into three, the US, allies of the US, nonaligned Western world, and then China. So, it's a very interesting dynamic from a global investors' perspective in terms of how one has to think about the total addressable market where, you know, last 10 years, we've been thinking that the world is your oyster. Again, now you got to think about the company, the country that it can address, whether it can grow there, and you can see this in the conversations we have with companies where the likes of Oracle are saying it's much tougher to grow in China versus SAP and they are competing companies.