Neptune’s experts consider the UK, European and Emerging Markets, the US and Japanese markets
1) The UK market: Jeremy Smith, manager of the Neptune UK Equity fund
"The outlook for 2010 is far from certain... The focus of the Neptune UK Equity Fund will be upon finding companies capable of growing their profits in an uncertain environment."
• The fourth quarter so far has been choppy. The rally has been increasingly narrowly driven by the weak dollar again pushing up commodity prices and some sector rotation into larger capitalisation companies.
• Overall, risk appetite has been waning, volumes have been low and interest in equities has dissipated, as worries have resurfaced over rising levels of unemployment and when growth will begin to turn positive.
• The Government has to walk a tightrope between ongoing fiscal and monetary support for the economy and handing over to the private sector again as growth resurfaces. Too much support could cause inflation to spike upwards and too little could cause the economy to fall back into recession.
2) The European market: Karim Ladha, assistant fund manager of Neptune European Opportunities fund
"There are still challenges ahead. Ireland and Spain face structural adjustments; German consumption remains anaemic; a strong euro adds to the headwinds; and the extent to which the real economy can wean itself off government fiscal stimulus is debatable."
• Nevertheless, economic data continues to improve e.g. PMI data is back in expansionary territory. On balance, the risks to the economy are likely to be to the upside as unemployment should continue improving. Inflation is less likely to be tolerated than in the UK or US and the ECB ought therefore to start to look to exit from some of its more unusual monetary policy tools in 2010. When and to what extent Trichet chooses to normalise interest rates will be of critical importance.
• The euro-dollar dynamic has been critical to markets since March. The future path of the euro-dollar and the reaction of equity markets to any reversal will be of great importance in 2010.
• In 2010, our focus will be on quality. Our investment process is geared towards identifying the best companies in each sector. These will be the companies able to grow market share and deliver earnings growth in an improving but still difficult and uncertain economic environment.
3) The Emerging markets: Ewan Thompson, manager of the Neptune Emerging Markets fund
"Whilst the outlook for infrastructure, materials and manufacturing remains very positive in the medium-term, Neptune believes that moving into 2010 the most exciting investment opportunities will be found in the consumer sectors across emerging markets."
• Whilst commentators earlier this year speculated that GDP growth in China would fall as low as 5.5 per cent, the reality has been very different, with China maybe even exceeding its 8 per cent growth target – above even the most optimistic expectations of a year ago.
• China’s robust domestic economy – both in terms of hard asset investment and domestic consumption – has provided a new end market for commodities and consumables whilst the OECD economies have fallen back. There has been a dramatic increase this year in exports to China from trade-oriented countries such as Taiwan and Korea, which have been switching sales of electronic products such as flat screen televisions towards China.
• Brazil has also demonstrated impressively resilient retail sales.
• Domestic consumption is really at the heart of the emerging markets growth story over the coming decades. Crucially, emerging market consumers are – unlike their western counterparts – underleveraged.
• We forecast that by 2020 the emerging market middle class will exceed the combined populations of the US, UK, Europe and Japan. Moreover, we forecast that as much as two-thirds of incremental GDP growth over the next five years will be located in emerging markets. This structural shift in the global economy in favour of emerging economies remains a compelling opportunity for investors going forward.
4) The US market: Felix Wintle, manager of the Neptune US Opportunities and Neptune US Max Alpha funds
"The impact of the $787bn US stimulus package, the continued rebound in corporate earnings and an exceptionally low interest rate environment should help to sustain economic and market momentum."
• US companies have consistently outperformed sell side earnings expectations, which has helped to maintain market momentum. We believe that in 2010 the market will reward those companies that are able to generate revenue growth despite a frail macroeconomic environment and leverage earnings from a reduced cost base.
• Market participants in 2010 will closely monitor the Fed’s funds rate decision, cautious of the announcement of a change in rate policy, especially as inflation concerns have begun to arise.
• Although housing data appears to be stabilising, we feel the housing recovery still looks “L” shaped, with low mortgage availability and a large inventory overhang likely to overshadow the sector in 2010.
• Trends in employment figures appear to be improving as the initial claims have trended lower as redundancies have ebbed. Therefore the health of the US consumer is likely to gradually improve as we see business confidence return and firms begin to hire again.
5) The Japanese market: Chris Taylor, manager of the Neptune Japan Opportunities fund
"Looking forward into 2010, we expect improved corporate earnings, though almost exclusively from the global companies that have little dependence upon the domestic economy. These firms have been aggressive in their cost-cutting and stand to additionally benefit from the long overdue depreciation of the yen. The combination of these factors should see such Japanese firms collectively turn in probably the highest prevailing rate of earnings expansion across the globe."
• Having closed 2008 at 859.24, and despite almost touching 1,000 during the third quarter, the broad market TOPIX index had fallen to near 800 as the end of November approached. This has made Japan one of the few countries to have seen its stock market decline for the year to date.
• In short order, the new DPJ Government derated the market, hitting corporate earnings growth across the board and causing the market to underperform on a global basis.
• Further, towards the end of the year, investors began to worry about the level of borrowing that Japan would incur as a result of the new government’s fiscal giveaways which would be hard to reduce, as both the tax take and the savings pool available to (re)finance increased government bond issuance are shrinking, as is the size of the actual population and domestic GDP.
• The Yen will depreciate given the worsening fiscal and demographic outlook.
6) The Macroeconomic Outlook: James Dowey, Chief Economist
"In 2009, to paraphrase the Rolling Stones, we got the policy we wanted. But as 2010 rolls on it looks like from here we might be lucky just to get the policy we need."
• The engine appears to be running again in Asia and Latin America but we have not yet seen any evidence in the US or Europe that the impetus for growth has passed from government onto sustainable private demand.
• Rising asset prices and the return of growth, though still reliant on government support, are adding fuel to the fire for those calling for the exit of supportive policy. On current evidence this is unbelievably premature.
• It is right for governments to signal a credible plan to consolidate their finances. And that will require a substantive gesture in the near future. But the broad thrust of fiscal policy must remain supportive for now.
• Following the bursting of one of the biggest bubbles in modern economic history, everyone is now a bubble-spotter. But a recovery in asset prices was one of the main reasons for having low interest rates in the first place. The bottom line is that central banks are unlikely to lean too heavily into rising asset prices in 2010. Nor should they.
• We remain confident that Beijing’s priority for now is to ensure strong growth and that it will be able to do so. But with other Asian currencies appreciating as policy rates rise next year and strong Chinese growth, China’s dollar peg will receive increasing attention. Asian governments are likely to join the US calling for an appreciation of the Chinese currency.
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