A world of opportunity

After eight years of falling interest rates and quantitative easing, most investors are wondering how long before the next great fall and when it will happen, mostly so they can dump their shares and avoid the pain suffered during the GFC.

Unless you think you’re Ray Dalio or George Soros, though, it’s most unlikely you’ll consistently time your way in and out of markets. A simpler strategy is to own discounted securities and take advantage of the opportunities across different regions.

Although we’re bottom up stock pickers, let’s go around the world in six minutes to see what promising investment themes currently exist.

Playing the different business cycles

In Australia, you need to be very selective. If there’s any hiccups with either China’s or Australia’s property markets, then Australia’s high consumer debt levels will be a problem.

In 2009, China’s unprecedented credit binge lifted resources-based economies like Australia and Canada out of the GFC quagmire. We can’t expect a repeat, though, particularly when so many Australians are already geared to the eyeballs.

That said, China has a few more options than Australia to manage a downturn, which, ironically, means a downturn in China could be worse for Australia than China.

Despite our fears about China’s increasing debt levels – in 2008 it took one Yuan of credit to create one Yuan of GDP, now it takes at least three times that – the large technology stocks have huge growth runways.

Baidu, Alibaba, Tencent and JD.com are no longer considered Silicon Valley copycats. Instead, they’re leading the world in many industries, such as Artificial Intelligence, Drone delivery testing and online payments. They also face little competition from cashed-up foreign technology companies.

Should China’s economy eventually require a recession to clean up its bad debt problems, we’d expect these companies to emerge even stronger, just as Google, Facebook and Amazon did in the US during the GFC. China’s technological emergence is still only in its infancy.

Dysfunction in the USA

Further afield in the US, concerns include higher interest rates, low growth, high valuations, a bloated Fed balance sheet, technological disruption and political dysfunction. But amongst this seemingly poisonous backdrop there is opportunity.

The cable TV giants will face increasing cable TV subscription losses over time, but their dominant positions providing high speed broadband internet are going from strength to strength. They’re also well positioned to benefit from increasing merger and acquisition activity with telecommunication companies.

Across the Atlantic, it’s the safest time to buy European banks in about 15 years. In contrast, it’s the riskiest time to buy Australian banks in nearly three decades.

With taxpayer support where necessary, the bad debt problems that have plagued Europe’s recovery since the GFC are shrinking. All the countries that were derogatorily coined the PIIGS (Portugal, Italy, Ireland, Greece and Spain), and caused so much concern in 2011 and 2012, are now recovering. Some are even experiencing housing booms.

Despite many banks being free of legacy GFC issues, dividend yields average 3-4% and will increase with interest rates and as the economic recovery broadens. Like US banks just prior to the Federal Reserve increasing interest rates last year, current valuations don’t reflect any increase in interest rates, nor the expected improvement in return on equity over the next couple of years.

Cable TV and broadband internet services remain poor by US standards in many parts of Europe, providing opportunities for companies prepared to invest large sums to update technology and connect more homes to faster networks. Ditto for large parts of Latin America, where broadband usage rates are often half what they are in developed economies.

Old cultures, new possibilities

India is also finally making the necessary reforms that could set the economy on a similar, albeit much slower, path as China. Although current stock market valuations suggest this is no secret, there are and will be enormous opportunities as hundreds of millions of people gain access to the internet on their mobile phones.

The country’s national online database called Aadhaar, which you access with a retina or fingerprint scan, promises to create a boom in lending for homes and businesses, particularly by those who have never had a formal id. It should also help reduce black market activity and increase India’s appalling tax take to build infrastructure and increase welfare.

The key point from this analysis is that there will always be opportunities for patient, long-term investors. But this is not the time to be complacent. This is the time to know exactly what you own, and why you own it.

What’s worked best over the past eight years is unlikely to work best over the next eight. If you need to change or tilt your portfolios, the current calm and ocean of liquidity provides a painless opportunity to do it.

In the spirit of the recent footy finals, it’s worth remembering the three famous words from John ‘Kanga’ Kennedy’s legendary half-time speech in the 1975 Australian rules VFL Grand Final. ‘Don’t think, do!’.

Disclosure: Peters MacGregor Capital Management Limited holds a financial interest in Baidu, JD.com and Tencent through various mandates where it acts as investment manager.

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