By Colin McLean, managing director, SVM Asset Management
Colin McLean
SVM portfolios are currently fully invested, recognising attractive valuations in the UK and Europe and a more encouraging outlook for global growth. In the US, news in construction, housing and retail suggests that the worst is past. US construction and housing sectors, representing in total one-sixth of the US economy, are steadily recovering. We believe that US recovery will beat expectations. US banks are also much better capitalised than UK and European ones, and have largely gone through their write-offs.
In contrast, much of European impairment, on commercial real estate in particular, has still to happen. Property transactions have fallen away sharply in Spain and Italy, suggesting that prices will need to fall to get activity going. This will hit banks again. However, the global economy is growing, helped by the US. And we expect stimulation in Europe and China.
Our portfolios have been helped this year, in a difficult environment for stockpicking, by being long of oil and gas E&P which has seen bids for Cove and Nautical, long of major “quality” stocks and being underweight in banking and financials. There is still a likelihood of tensions increasing in Iran, which could put upward pressure on the oil price.
We remain low in bank exposure, and also in base metals, reflecting slower growth in China and its shift from infrastructure to consumption. However, a lot of large cap Europe listed global businesses are still attractive and offer value. The trend to re-rate credit quality is only part way through, and large cap European defensives still offer value; tobacco, some pharma, food and consumer staples. Many AIM stocks and some other small caps, particularly in mining, have been left behind in the recent rally and are close to relative lows. We believe there is still a liquidity problem to come in AIM and small caps with forced exits likely in time.