Emma Wall: Hello, and welcome to Morningstar. I am Emma Wall and joining me today to give his three sector picks is Andrew Cole, Manager of the Pictet Multi Asset Portfolio.
Hi, Andrew.
Andrew Cole: Hi.
Wall: So, what's the first sector you'd like to highlight today?
Cole: Well, it's Japan. We want to be cyclical, we want to be exposed to global growth and earnings, and we find plenty of that in Japan. Japan also has and Japanese companies tend to have the benefit of particularly going through this cycle that they're less leveraged, i.e., they've got less debt on their balance sheet and, actually, they are seeing a marked improvement in terms of their return on equity. It's a market that performs always in fits and starts. So, we'd have to learn to be patient, but we continue to like Japanese stocks.
Wall: And a lot of people are quite negative on Japan because of the demographics, because of the aging population. Is that a concern for you?
Cole: No. Other than that, I think, you can own government bonds and get poorer in real terms, or if you want to maintain any sense of lifestyle, I think, you'll have to eventually be forced to move down the capital structure. And as I say, we see growing dividends, growing earnings, and an improvement in return on equity and we think both domestic and, importantly, which tends to drive the market, overseas investors are returning their attentions back towards Japan.
Wall: And what's the second sector pick?
Cole: Second sector pick is generally is that cyclicality. So, we continue to like technology. It is a structural growth story. Along with the mining and the energy sectors, as I say, we see stronger global growth. The global economy is growing at above trend that tends to be inflationary. It tends to be good for those companies that can grow their profits in nominal terms. We want to be exposed to that.
Wall: And the third pick is not one that you like. Is it? It's one that you're actually avoiding. What's that sector?
Cole: We continue to avoid credit. All these guys are aware that many sectors have become much more leveraged through this economic cycle and that indeed much of the financing of this economic expansion has not been done by banks. It’s been done via the public markets, whether that’s be corporate bonds, investment-grade, high yield and, more recently, leveraged loans and private lending. And there we see covenants declining.
So, there is less protection for the lender, a more wriggle room for the borrower with very low spreads and pretty high expectations in terms of low defaults and high recovery rates. And we think that many parts of the credit market will be – or are untested for any economic downturn as and when it comes. No, we are not forecasting it comes any time soon, but we are aware that you're not priced for that risk.
Wall: Andrew, thank you very much.
Cole: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
