Don't let 'sky is falling' mentality cloud view

Mr Perks, chief investment officer for equity at Franklin Templeton, says with the US Federal Reserve taking care not to raise rates too early, favourable financial market conditions are likely to continue.
Mr Perks, chief investment officer for equity at Franklin Templeton, says with the US Federal Reserve taking care not to raise rates too early, favourable financial market conditions are likely to continue.ST PHOTO: MARCUS TAN

Mr Edward Perks, chief investment officer for equity at Franklin Templeton Investments, discusses with Jeremy Koh his outlook for global markets in the latest in our series featuring fund managers and leading market experts

Major stock indices in the United States and Europe have recovered somewhat after suffering declines in market volatility at the start of the year.

But uncertainty about global growth and fears about the ongoing impact of low oil prices are clouding the outlook of many investors.

Against this backdrop, however, Mr Perks still sees opportunities in some oil companies, banks and pharmaceutical companies. He manages about US$85 billion (S$115 billion) of funds.

Q What is your global outlook for the equities side?

A What stands out to me was that as we got to the end of last year, the market broadly was interpreting all data, all news as being negative. It had a "sky is falling" mentality. That impacted markets broadly.

SELLING NON-CORE BUSINESS

In the last three or four years, major pharmaceuticals firms have been selling non-core business divisions and trying to deploy proceeds in a way that benefits shareholders.

'' MR EDWARD PERKS, on firms focusing more on core competency areas.

Some of the issues are certainly real, like an uncertain global economic outlook and falling commodity prices which affect energy producers. However, the market overlooked some factors and pushed the prices of some stocks too low.

We think there are still some opportunities, supported by US growth. It may not be spectacular growth, but there is still growth and it is stable. This is a strong engine for the world.

We also have clearer evidence based on the previous US Federal Reserve's minutes that the Fed is very cautious not to raise rates prematurely, due to the global economic uncertainty. Thus, favourable financial market conditions are likely to continue.

Q Where do you see opportunity in the oil sector?

A We like integrated oil companies - companies that produce oil and gas, and process these into things like jet fuel and gasoline.

This is because the market has discounted the extent low oil prices have benefited such companies.

The production businesses of these firms are indeed hit by lower oil prices. Such price levels mean they can't sell what they produce for as much. Indeed, I would argue that below US$40 a barrel - Brent or West Texas Intermediate - many of the companies that produce oil are not economic.

However, divisions that process the extracted oil into things like jet fuel and gasoline will benefit from the lower cost of oil.

Also, the lower oil prices will take out the weaker integrated oil players, benefiting the stronger companies in the long run.

Through our analysis and conversations with management teams, we felt dividends of some firms to be more secure than the market was expecting.

We've already started to see some recovery in integrated oil stocks. Royal Dutch Shell is one of our largest holdings. We continue to find the dividend yield extremely attractive.

Q What opportunities do you see in banks?

A Markets have undervalued some of banks on the worry that if the Fed hikes rates more slowly, banks' net interest margin growth may be subdued.

That has caused some investors to rotate out of the stocks. Some of the highest-quality banks, say JP Morgan, are still meaningfully lower than their highs last year. While the US market today is only 4 per cent away from its highs last year, some of the financials are 20 per cent away from their highs last year, so there's good value.

Some investors are also concerned that regulation, which among other things requires banks to hold more capital, will reduce bank profitability overall. Also, there are worries about litigation against banks.

It's true that holding more capital would limit bank profitability.

But we think regulation is a positive as well, as it reduces the risks of banks. That is an offset and could warrant a higher valuation.

Investors were also afraid banks would suffer losses due to the commodity sector downturn and growth uncertainty in some regions in the world, but some banks will not be affected as badly as these investors think.

Q Which banks do you find attractive?

A We're finding these banks in regions around the world and it's not limited to just US financials.

Q Where do you see opportunities in pharmaceuticals?

A We like some major pharmaceuticals companies like Pfizer, AstraZeneca, Sanofi and Roche.

In the last three or four years, major pharmaceuticals firms have been selling non-core business divisions and trying to deploy proceeds in a way that benefits shareholders.

They think that because global growth is fairly low, returns can be bolstered by focusing more on core competency areas, and driving efficiency in drug research and development. The latter likely leads to the creation of new products which will improve revenue.

Management teams will likely continue to focus on these, boosting share price beyond current levels.

The demographic trends in many parts of the globe also support demand for the pharma- ceuticals sector.

Q What is your advice to the retail investor?

A Be patient. Investors lose that perspective when markets get volatile.

We encourage investors to stick to a plan and have a longer-term focus.

A version of this article appeared in the print edition of The Sunday Times on April 24, 2016, with the headline 'Don't let 'sky is falling' mentality cloud view'. Print Edition | Subscribe