BlackRock has identified finance companies as the strongest sector bet in a global equities market artificially inflated by quantitative easing.
Ewan Cameron Watt, chief investment strategist of the BlackRock Investment Institute, who met with investors in Australia over the past few days, has flagged the impending rise in US interest rates as boosting profit margins, while the separation of investment and retail arms of large banks in Europe is likely to be viewed favourably by markets.
Watt saw the rise in interest rates as favourable due to the practice of banks putting up interest rates on loans before they raised rates on deposits. He also saw insurers as benefiting from yield curves starting to rise as a result of higher US treasury bond yields.
While generally cautious of most parts of the equity market, Watt also named Japan as his favoured country bet.
He saw Japan benefiting from a growth in domestic demand for equities and due to company earnings being understated on a global like-for-like basis.
Watt’s views on finance companies have been challenged by Brian Parker, chief economist for Sunsuper, who believes continued regulatory pressure on banks to hold more capital will inhibit the growth investors have grown accustomed to. While, he sees high private sector debt levels as a limit to how much more debt could be accumulated.
“From 1990s to the 2000s the banks delivered double digit earnings growth and a lot of investors had this view that this is what banks do,” he says. “But that was the best time to be in banking in the Western world, it may not be the next 20-30 years.”
Parker is looking to unlisted property, infrastructure and private equity for value with public markets being so highly valued.
Sunsuper is exercising great caution in the price it pays for such assets, but recognises that where valuations are right, they can offer yields greater than those found in public markets.
At its last published accounts to the end of June 2014, Sunsuper’s balanced fund held overweight positions to these three asset classes at 24.3 per cent against a strategic allocation of 22 per cent.
One of the ways Sunsuper has been able to get lower prices is through partnerships with private equity fund managers which need the scale of a large institutional investor to complete transactions.
“We are very disciplined about what we pay, we are quite happy to invest in assets where we are getting a decent yield and to take money off the table when we are not,” said Parker.