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Developing themes


The last decade has brought a dramatic rise in uncertainty. It has provided two global recessions, increased geopolitical risk, as well as the threats of climate change. It also brought tremendous opportun ities for investors through the rapid emergence of developing economies and a growing awareness of demand pressures on the world’s resources.

It is these two factors that will continue to be a major influence on inv estment returns in the coming decade.

Growth in emerging economies seems certain to exceed that of the West, and the non-UK equity funds we hold are invested mostly in companies that derive their earnings from emerging regions with the prospect of greater returns. Another factor here is that many of the Western companies operating in emerging regions can be bought at much more attractive valuations than their local counter parts. At the moment, we like Asian currency against sterling, a view which is validated by a strong first-quarter economic growth figure of 32 per cent for Singapore, thus favouring the Schroder Asian bond.

We will also continue to maintain exposure to some longer-term themes, such as water. Just this week, a study by the Engineering and Physical Sciences Research Council warns that global supply chains need reforming to tackle growing water risks. Water is one of the most undervalued natural resources and there is a limited supply of drinkable water worldwide, such that about a third of the world’s population suffers
from water shortages and poor-quality drinking water.

Population growth and the increasing wealth of people in developing countries, means demand for water and more water-intensive food, such as meat, is only going to grow. This is compounded the fact that the supply of drinkable water is limited and a lot of it is in countries other than those that have the greatest need of it. Therefore, we have increased out holding in Utilico emerging market utilities, making the supply and servicing of water and power a key theme as we also hold Ecofin water and power.

Given our preference for large-cap, defensive equities in the UK with strong yields, balance sheet strength and greater visibility of earnings, we favour Rensburg UK equity income which focuses on FTSE 100 index companies, Neptune income and CF Walker Crisps equity income fund.

Policy announcements will be a factor affecting investors. Interest rates will remain lower for longer. Central banks will keep official rates close to zero well into this year because infla tion remains below target and for fear of halting the recovery in its tracks.

During this uncertainty, investors will be able to take advantage of relatively high and secure yields from certain equity and bond investments. Yield will remain important in a world of low cash returns while any yield compression would boost returns if a scenario of faster than expected economic growth were to appear.

Sam Liddle is manager of the CF Miton global growth and global income portfolios


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