Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Michael Spinks, Manager of the Investec Diversified Growth Fund, to give his three theme picks for growth.
Hi, Michael.
Michael Spinks: Hi, Emma.
Wall: So, what's the first pick today?
Spinks: So, the first today is, in equity markets, I'd like to talk about Japan. So, long forgotten by many investors for many years, Japanese equities are trading cheaply relative to their global counterparts at about a 30% discount to global equities and they have been really helped by this impetus to change their behaviour.
So, for a number of years they were around primarily for the employees rather than the shareholders and a lot of that has changed. And we've really been focusing on those companies that are making improvements to their corporate governance. So, more non-executive directors on the boards, for instance, improving the shareholder payouts, increasing dividend yields.
So, companies such as Kao Corp, for instance, which is a consumer company, that's increased their dividend every year for the past 26 years. So, those types of fundamental changes, I think, are really powerful. Companies who are really embracing changes well. So, a company like Hitachi, for instance, has really been embracing the need to put in more corporate governance reform. So, we particularly like Japan. And also, where investors have been put off in the past is the relationship with the currency and that also interestingly has changed. So, you could see a stronger currency and a stronger equity market which will be, I think, an additional driver behind returns.
Wall: And why are these policies not priced in? Because if you look at someone like the US, a tax reform that is yet to be delivered is already priced into equities. Whereas somewhere like Japan, policies which have ensured that the companies are putting shareholders more to the front of what they do is already rolled out and yet, it's not priced in for some reason.
Spinks: I think it's partly participation. So, if you look at the Japanese equity markets, there has been more domestic buying, for instance, by the very largest pension schemes encouraging movement out of fixed income into equity. But perhaps global equity investors have been put off partially by this currency linkage in the past. And over the past about nine months, we have seen that shift. So, from an unhedged perspective, you've been able to get both returns, but I think that's likely to persist, which will draw more investors into this improving quality and still attractive valuations.
Wall: And what's the second theme pick today?
Spinks: So, stay in Asia but moving to slightly west, the Indian rupee, so the currency. Again, a position that we've had for some time and I think continues to offer really attractive fundamentals. So, here you're getting paid a higher rate of interest than you would earn domestically. You're obviously taking on some risk for that, but we think that risk is very fully rewarded, and you've got the opportunity to earn additional return from appreciation of the currency.
So, we had a change of government a little over three years ago now. They are pushing through much greater reform. You've got a very strong domestic central bank and central bank governor committee to tying down inflation. And on a very long-term basis, there's really interesting trends around digitisation, so capturing more data in the economy, improving the tax take for the government. And obviously, as a country, it's got a vast amount of potential that to date has been really untapped. So, we think that's really going to come through and continue to reward investors in the year ahead.
Wall: So, from one currency that you do like to another which you don't, because your third theme pick is actually short position, isn't it?
Spinks: Yeah. So, I think, the Mexican peso is a currency that we would expect to weaken in the year ahead and there's a number of themes going on with Mexico. Clearly, this time last year it's already been battered by the potential effect of Trump and you've seen quite a lot of appreciation of the currency as maybe fears of that have moved to side over the past year. But looking forward, we still have the renegotiation of the NAFTA, the North American Free Trade Agreement. So, that could potentially affect the currency as the US is making some quite harsh demands. We've also got domestic change of government and elections as well, and the potential for a much more left-wing government to come into play. And there are also changes taking place in terms of inflation dynamics in Mexico. So, we see a weakening of the Mexican currency which can also play quite a key part in terms of providing some defensive exposure to the overall portfolio.
Wall: Michael, thank you very much.
Spinks: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
