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3 Investment Ideas for 2012 and Beyond

A review of some of the major investment themes from the 2012 Morningstar Investment Conference

Alanna Petroff 18 May, 2012 | 9:29AM

Securities Mentioned in This Video
Compagnie Financiere Richemont (CFR)
Vodafone Group (VOD)
Telefonica (TEF)
LVMH Moet Hennessy Louis Vuitton (MC)
Wolseley (WOS)

Stories Mentioned in This Video
- How Much Should You Invest in Growth Markets?
- A View from the Top
- Finding Bonds Yielding Between 4% to 9%
- Growth in the High-Yield Bond Market in Europe
- European Equities Pay You More than Their Bonds
- Pick and Choose When Investing In Asia
- Going Against the Flow When Picking Stocks
- 7 Key Chinese Industries Ripe for Investment

Video Transcript
Alanna Petroff: Welcome to the Weekly Wrap. Now we all know it was a terrible week in the markets, but thankfully we have some investment ideas for you today. We just finished hosting our 6th annual Morningstar Investment Conference, where we had a range of investment professionals talking about a variety of different investment ideas. So, joining me today to speak about this is Holly Cook, and we're going to talk about the most compelling themes that were discussed at the conference.

Okay, Holly, so let's go over the main themes that stuck out for you.

Holly Cook: Well, I think, one of the very main themes was that there was an awful lot of movement going on in the investment world, but it's almost as if every single potential investment area you could have a pop at, so there's kind of like a lack of conviction really.

However, having said that, I'd say the three themes that really stuck out for me was emerging markets; within Europe it's the high-yielding bonds and stocks; and also a potential hot pick idea which is the US housing market.

Petroff: Okay. So, let's go over emerging markets first. I did find that the most interesting. A lot of people were talking about that in the conference.

Cook: Absolutely, so one of our first presentations actually on day one, came from Goldman Sachs Asset Management, in which they talked about what they termed the “growth markets”. Now they see these as the BRICs, plus four others. So, those are Mexico, Indonesia, Turkey and South Korea. And they believe that these eight economies are going to be amongst the fuel-drivers for the global economy over the next 10 years. They're really very optimistic on global growth, unlike most other people. And so, they were saying that you need to be invested in these markets, if you want to get any decent return really. We know that people have been talking about emerging markets for years: they go hot, they go cold, they go hot, they go cold. But what they [Goldman Sachs] were saying is that if you want to be tapping into the full potential of emerging markets, you need to be investing directly in those companies.

Conversely, we had quite a few other presenters at the conference who were saying that, yes, emerging markets growth is the only place you're going to get any growth over the next few years. But for safety, you should really be tapping into that growth by investing in developed-market companies that have exposure there, that generate revenues there, so that's like your Richemonts (CFR), your Vodafones (VOD), your Telefonicas (TEF). And that's a theme that we're very familiar with.

Petroff: Yes. Definitely, I remember that LVMH (MC) was mentioned as well as a very compelling choice for the emerging markets, which is quite interesting, but they have lots of money over there, lots of new millionaires and billionaires who want to buy luxury goods, so it is a very interesting idea.

Cook: Absolutely, and then almost on the flip side of that, is those economies that are perhaps a few stages behind, that are really putting a lot of money into infrastructure in order to develop quickly. So you've got the construction/infrastructure sectors, as well, as another interesting place to look at.

Petroff: Okay. So, now let's move on to the second theme of high-yields.

Cook: So, high-yield, we know that everybody is looking for income. It's increasingly hard to find that income, that extra yield in your portfolio given the state of the developed markets. So high-yielding stocks and high-yielding bonds was a definite theme that came out of the conference.

On the bond side, I thought it was very interesting that one of our presenters was telling us that companies are going to increasingly be going to the bond market to borrow money rather than going to the banks, because the bank's balance sheets aren't really in a position to be lending. So, high-yield supply is going to increase. The bond market is going to grow, just as us, the investors, our demand is growing in order to find this extra income.

Petroff: It's especially the baby boomer generation that is going to be looking for that yield. So you're seeing the rise in supply and demand.

Cook: Absolutely, and one idea that I thought was very interesting was that one of our presenters was saying that it's the BBB corporate bonds that you really want to be looking at, because the AAAs for example they may be very safe, but they're very low in yields. If you can afford a little bit more risk, you can potentially get a notably higher return.

Petroff: Exactly, I was hearing he was talking about yields of 4% to 9%, and I thought that sounded okay.

Cook: Yeah. Absolutely. But as well as the high-yielding bonds, we've also got the high-yielding stocks. So, several managers mentioned again and again that where they would be looking for income, should that be the area that they're going to invest in, they would really be looking for reliable, stable, quality, large-cap companies, potentially that have exposure to emerging markets, but that are paying dividends and paying dividends again and again and again. And we know that that is a very popular area, particularly for UK investors. But one additional idea was to start looking at the small-caps more for dividends. But one point I think that's really worth keeping in mind is that if you're going to be looking for dividends, you need to keep in mind why is it that that company is paying the dividend? What's fuelling it? But in general, any company that is going to pay a dividend, there is an awful lot of conviction that goes into that. It's not a decision that they're going to take lightly. So, if you can find a company that is committed to paying its dividend, and is potentially growing it year-on-year, then that's something that can help you protect your capital.

Petroff: And now the third theme that you wanted to go over, I found possibly the most interesting, it was the most surprising, I think.

Cook: Absolutely, so this is the US housing market. So one adviser in the audience asked a couple of our fund manager panellists: if they had a £100,000 to invest today, where would they put it? Now…

Petroff: I was so excited for this answer.

Cook: So, obviously there's several caveats that should go with their answers, which they were very keen to point out: they don't give financial advice, and they're not into kind of picking just one asset, and it very much depends on your own personal goals, and your own personal portfolio... But one manager did say that given the torrid years that the American housing market has had, that if they had £100,000 today, they would go and buy a house in America.

Now, it's very interesting to hear a manager say something like this, and of course, for most UK investors we don't have £100,000 to go and stick on a house in America.

Petroff: Unfortunately, no.

Cook: But what it could be interesting to do is perhaps maybe look at some of the ETFs that might track the construction industry or US housing, or real estate investment trusts. So that was a bit of a hot pick, I thought. It was a theme that was mentioned by several other managers as well--a turnaround in the US housing market.

Petroff: I was surprised at how often it came up, because you don't hear much about the US housing market, except for bad news generally.

Cook: Absolutely, and of course, I suppose you could also be looking at perhaps companies that are linked to the US housing market, but are based elsewhere. So Wolseley (WOS) for example is a company that supplies plumbing and building materials predominantly in the US. So, that's another idea.

Petroff: Okay. Well, that wraps it up, I guess. Thank you for joining us for the Weekly Wrap.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.