Report Says Astute Investors Can Find Opportunities Despite Challenges
LONDON and NEW YORK, December 21, 2011 — Emerging markets and commodities are among the pockets of opportunity highlighted in the recently published BNY Mellon Investment Outlook for 2012.
The outlook is a compendium of distinctive views from BNY Mellon Asset Management's specialist boutiques across asset classes and regions. The outlook notes that developed market challenges such as the eurozone crisis and the U.S. budget deficit continue to cast a cloud over the investment horizon. However, astute investors may be able to take advantage of market dislocations and trends that are beginning to develop.
The apparent sell-off in emerging markets equities has created compelling valuations, according to The Boston Company Asset Management. "We believe the 2011 correction has created a far more compelling valuation opportunity within the asset class than we saw heading into 2011," said Kirk Henry, senior managing director and senior portfolio manager for The Boston Company, BNY Mellon's value equity specialist.
Brazil, Russia, India and China, which comprise the BRIC countries, may offer attractive opportunities, with the most intriguing prospects in smaller, domestically focused business that can tap the consumer market, according to the report.
Commodities could provide the type of diversification that can help investors contend with factors such as the U.S. presidential election, the budget deficit debate, and the potential for inflation in many countries, according to the forecast from Mellon Capital Management Corporation, BNY Mellon's San Francisco-based global multi-asset specialist.
"With continuing volatility, we think commodities such as agricultural, soft commodities, livestock and precious metals offer good diversification with assets that have a low correlation with stocks and bonds," said Kenton K. Yee, senior research analyst for Mellon Capital. "However, we would exclude energy and industrial metals, as the expansion of Chinese industry and construction has strengthened the correlation between corporate profits and energy and industrial metals prices. These commodities appear to have become pro-cyclical like growth stocks."
The sheer scale of indebtedness has rendered many economies unusually vulnerable, according to Newton Investment Management Limited. "This ensures that state intervention, with all of its potential distortions, remains one of our key themes as countries, institutions and individuals struggle to deleverage," said James Harries, investment manager-global funds, at Newton.
With low yields on government bonds in the majority of leading economies, Newton said the best opportunities appear to be in high-quality dividend-paying equities that have strong growth potential and in corporate debt markets.
The eurozone issues are complicating investment decisions for currency experts, according to Pareto Investment Management. "The spectrum of possible outcomes to the European crisis remains very broad and the investment implications at each point may be very different," said Constantine Ponticos, managing director, investment research, at Pareto. "If there is an expected major development in the eurozone, there will be an almighty scramble for U.S. dollars."
Ponticos added, "Outperforming currencies will need to be tied to economies capable of generating growth through domestic demand or be a satellite of an economic block capable of doing so. It also must have a relatively secure financing." While Ponticos said some emerging markets currencies appear to meet these criteria, he added, "Overall though, we think 2012 will be the year of the dollar."
In real estate, Urdang Securities Management foresees a period of continuing low growth and believes that investors may benefit from locking in yields now. Todd Briddell, president and chief investment officer of URDANG, said his group is focusing on companies with low leverage and sufficient liquidity because of the opportunities they can offer in the current market.
"We are finding significant discounts to net asset value (NAV) in REITs (real estate investment trusts) in global markets," Briddell said. "From a spread perspective, dividend yields on REITs are significantly above local treasury yields in regions around the world."
The overall uncertain economic and market environment highlights the importance of allocating a significant part of the portfolio to uncorrelated investments, according to London-based Insight Investment Management. "In our view, genuine absolute return strategies can help fulfill this role," said Andy Cawker, head of specialist equities at Insight. "These strategies have the potential to provide investors with the best of both worlds, as they can help protect capital as markets fall and also be well placed to benefit from potential fundamental opportunities that might arrive."
Standish Mellon Asset Management Company LLC , the Boston-based fixed income specialist continues to have a favorable outlook on assets tied to the economies of risky countries (ASTERISCS(sm)), which have commonly been called "emerging markets." Alexander Kozhemiakin, senior portfolio manager at Standish, said he prefers the term "ASTERISCS" as it more correctly defines this type of assets. He said, "These non-rich countries may present significant opportunities in fixed income as their economies are starting from a lower level of wealth, have the promise of faster growth rates, and have avoided the debt excesses plaguing the developed economies."
The Boston Company Asset Management, Mellon Capital Management Corporation, Newton Investment Management Limited, Pareto Investment Management, Urdang Securities Management, Insight Investment Management, and Standish Mellon Asset Management Company LLC are owned by The Bank of New York Mellon Corporation.
BNY Mellon Asset Management is one of the world's leading asset management organizations, encompassing BNY Mellon's affiliated investment management firms and global distribution companies. Information about BNY Mellon Asset Management can be found at www.bnymellonam.com.
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*'Newton' refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited, Newton International Investment Management Limited, Newton Capital Management LLC and Newton Fund Managers (C.I.) Limited. Assets under management include assets managed by all of these companies except Newton Capital Management LLC, which provides marketing services in the U.S. for Newton Capital Management Limited. Except for Newton Capital Management LLC and Newton Capital Management Limited, none of the other Newton companies offer services in the US and Canada. Newton Capital Management Limited is registered in the United States as an investment adviser under the Investment Advisers Act of 1940. Unless otherwise stated, all information source BNY Mellon Asset Management as at 30 September 2011. This press release is qualified for issuance in the UK, US and Canada and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorised. This press release is issued by BNY Mellon Asset Management (US & Canada) and BNY Mellon Asset Management International Limited (ex-US/Canada) to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance. Registered office of BNY Mellon Asset Management International: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorised and regulated by the Financial Services Authority. A BNY Mellon Company(SM)