Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Michael Spinks, manager of the Investec Diversified Growth Fund.
Hi, Michael.
Michael Spinks: Hi, Emma.
Wall: So, growth in the fund name, and we are talking about growth today. We've come to the end of 2017 and this is always a nice point to have a look back at the last 12 months and indeed, a forward look into 2018. What has driven growth for investors in 2017?
Spinks: Well, I think that phrase growth is absolutely key. You're right. It's been a year where from a macro perspective growth across the board has actually been very robust for the first time in years. So, the U.S. driven by solid consumer income, a return of the corporate sector to spending. But more importantly, outside of that, in Europe, we've seen finally the results of all that stimulus over the years.
Japan, famously of course being a laggard for so many years now having quite strong growth, very low levels of unemployment and even some signs of inflation coming through. And I think the most important factor from a macro perspective has been China where they are putting quite a lot of stimulus and that really drove us and markets over the year.
Wall: I mean, sitting here this time last year if you'd said that all assets were going to rise pretty much in 2017, we are going to have synchronised economic growth, you probably wouldn't have believed us. Can we say the same it's going to happen in another 12 months?
Spinks: Sure. I think you are absolutely right and the consensus has been confounded over the past year. I mean, looking ahead, clearly, there's a lot more expectation now backed into prices and I think that's one of the primary issues for the year ahead. But there is still this solid robust growth backdrop, interest rates generally remain very low or expectations of rises are also priced into the market.
So, I think, it is almost going to that classic later stage of the cycle where valuations do become richer, but the fundamental backdrop remains robust. So, we would describe it as not an environment where you need to run for cover, but certainly to run a much more balanced risk profile.
Wall: And I think as ever timing is very difficult when it comes to investing. If you were able to say, right, the correction is going to happen on this date, on this year, then you'd be a multi multi-millionaire. But considering how late we are in that cycle, you have alluded to the fact that it isn't run for cover time yet. So, what should we expect from markets over the next year? Where can we see the last of that growth in this cycle?
Spinks: So, I think, this is where the concept of breadth is so important, because being able to find opportunities beyond just the expensive areas in equity markets, and if you look at – for equity investors who are concerned about valuation, Japan is somewhere where we have been focused on for a very long time, which is 30% cheap relative to global equity for very similar level of return on the underlying stocks.
So, there are still opportunities out there. I think that the most favorable areas of the equity market are the ones that are more cyclical in nature. But that also makes sense given the backdrop where we do still see a continued firming in terms of economic activity.
Wall: And what about bonds and alternatives? Is it just still about equities in terms of looking at that superior return?
Spinks: Well, I think, the interesting thing about bond markets is they have been avoided for so long by so many investors and now, of course, as you get raising interest rates where we are seeing opportunity is in differentiation. So, for markets, like in Australia, for instance, which doesn't have the same robust fundamentals as the U.S. does.
Any expectation that interest rates will go up, I think, creates an opportunity, because we would expect to see very few interest rate rises coming from Australia. So, still some opportunities in bond markets and obviously, yields are at very low levels. I can understand why they are at low levels, because of this long-term economic impact is playing out.
Wall: So, I suppose the forecast for 2018 is there are pockets of value. You just have to look for them. And it's not run for cover yet, but it will be lower returns?
Spinks: I think we can expect lower returns, but I think in fairness a lot of us have been saying that for some time and I think because you are just looking at the headline. And what we found this time last year was a multiple number of opportunities where we found the consensus was just – was just grown on that front. But we are still finding opportunities.
Some of them are also defensive in nature. So, being able to find opportunities that will protect while also providing a positive expected return is something that we are still finding on multiple fronts.
Wall: Michael, thank you very much.
Spinks: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
