Investor strategy

Investors are increasingly going global, looking to invest outside their home markets in the search for higher returns. Andreas Utermann, global chief investment officer at the fund management firm RCM, is well placed to answer your questions on this theme. As the main global equity company for Allianz Global Investors, RCM manages some $152bn of assets around the world.

One of the leaders of the European asset management industry, Mr Utermann is an articulate and perceptive reader of markets. He joined RCM in 2002 as global CIO. Previously he spent 12 years at Merrill Lynch Asset Management and its predecessor Mercury Asset Management. Mr Utermann also serves as global CIO equities for Allianz Global Investors which manages some €971bn of assets for clients.

Mr Utermann answers your questions below.

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What do you think about recently announced Barclays-ABN Amro transaction? Do you really believe in synergies announced by top executives? Do you believe in a successful marriage?
Vaclav Havlicek, Prague

Andreas Utermann: The merger is a precursor of what is to come in the European financial services industry. It is too early to ascertain if the synergies are ”on top” or double-counted, ie were already partly counted in previous efficiency initiatives. The next few days will give an answer.

From an ABN shareholder’s perspective this appears a good deal, from a Barclays’ perspective it is more neutral as we can see no earnings accretion until 2010. That being said, the corporate cultures of the two banks seem better suited to each other than most and in the long run I would give this a fair chance of success (and I don’t believe in mergers generally).

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Is the current era of low volatility from Yen and Swiss carry trades here to stay? What do you foresee in currency options markets over the next several years?
Gregory Jones, Boston, USA

Andreas Utermann: Probably not. The carry trades are one of the main drivers of global liquidity creation that has run ahead of global nominal GDP growth by 3 to 4 per cent per annum over the past few years. If unchecked, this will lead to inflationary pressures. The world’s central banks are well aware of this and will attempt to slowly strangle this liquidity creation mechanism. This obviously necessitates higher absolute levels of interest rates globally and, more specifically, a continued recovery in the Japanese economy that will narrow the interest rate gap with the rest of the world.

As we saw in May 2006 and again in February 2007, fears of an abrupt end of the carry trades lead to higher levels of volatility as risk appetite drops. It’s the combination of higher rates and smaller differentials that will increase volatility. We must hope that the central banks will achieve this over the coming 12-18 months without major disruptions.

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The US is no longer the only driver of world economic growth. In this context, how can we explain the fact that world stock markets still attach so much importance to what is happening in the US stock market?
Emanuel Claudio Reis Carvalho Leao

Andreas Utermann: Agreed. But let us remember that US capital markets are still the most vibrant, deep, active and free, operating in a secure legal environment. As such, the US capital markets will continue to attract very significant capital flows into the future and I expect that the lessons from the overly restrictive SOX legislation will have been well and truly learned and that we will see the US fight back.

Also, with a major driver in economic activity being ”homo economicus” (the individual economic agent) US private consumption will continue to be very strong over long periods as the optimism that characterizes US society leads to more risk taking (which in turn is supported by easy access to finance), higher leverage than in other societies. In addition, so much innovation in so many industries emanates from the US. As it becomes a magnet with critical mass for young entrepreneurs globally, what happens in the US is still of great importance to all of us.

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The pound has been falling against the Canadian dollar for the last two months. Any predictions for the next two months?
Tony Barton Toronto, Canada

Andreas Utermann: Not one of the more liquid cross rates. Nevertheless, I think that sterling will trade in a relatively narrow range, with the CD continuing to slowly appreciate as the US dollar weakens at the same time. The CD will be supported by continuing relative strength of the global economy and associated commodity prices, while sterling may suffer a little as rising interest rates finally take a toll on the overheating UK economy.

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In a recent article in FT, William Rhodes, of Citigroup, warned of a major correction within the next twelve months. Assuming it happens, would you recommend staying invested and riding it out, or getting into cash? If the latter, what percentage would be the maximum loss an individual investor can accept before throwing in the towel and liquidating?
Rolando S Villacorta, Jr, Makati City, Philippines

Andreas Utermann: It is a good question but one it is difficult to give an answer to in a blanket way. Firstly, it depends on the amount of your assets invested in equities and your age (the younger you are, the more equities you should own). Unless you want to be very active and on top of your investments and trade them, the best answer is to invest in equities with a buy and hold strategy.

After a bull market of several years, like we have seen, and with the equity portion of any portfolio drifting up as a result of the equity market rise, one may wish to take profit to get closer to one’s ideal asset allocation, whatever that may be, and conversely upon sharp falls in markets one may opt to buy back. I would think a stop loss strategy does not work for long-term investors as that would lead to pro-cyclical, value destroying behaviour, whereas it may well be appropriate for more trading orientated market participants. In the latter case, one may well want to lighten up if losses exceed 10 per cent. As a long-term investor, one may well want to top up if the droop in the market reaches 15 to 20 per cent.

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Seeing the potential growth in investing in real estate in Berlin, is it still a good place to invest? Why do the Germans not do so by latching on to the idea as the Brits are doing both on mainland Britain and other parts of the continent. Finally, is there anything I should be wary of before taking the plunge in Berlin real estate?
Dharmesh Ganatra, London

Andreas Utermann: The one aspect missing from this recovery is a reawakening of risk-taking appetite at an individual and society level, present in the 1950s and the 1920s. This could be one explanation why Germans are reluctant to own they own home (one would need to leverage oneself – shock horror) or get into buy and let.

With rental yields for residential real estate between 6 per cent and 8 per cent and mortgage rates in the four to five per cent range, this would be a no-brainer. Certainly, prices in Berlin for example are cheap but clearly every property has different characteristics and every borough in Berlin has different migration statistics and patterns.

So for an assessment of the opportunities check those out first and mind the high onus on the landlord and strong rights of tenants – another reason why buy to let at an individual level is lower as a percentage than in other European countries. But overall I am bullish on German residential real estate and have bought, and still am buying, for my personal portfolio.

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What is your view on the German economy? Is the recent upswing a false dawn?
Samuel Joab, London

Andreas Utermann: We believe the German economy to be in a secular upward trend with rising employment, strong GDP growth and improving budget balances at all levels of government. This was made possible by the many years of restraint wage demands that have led Germany to re-emerge as the world’s leading exporter. Clearly, this could still be derailed by renewed surges in wage demands but currently it seems that more work for less pay is still the story of the day. And perhaps even tax cuts could be on the agenda again.

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What do you think of the Chinese stock market and what will be your strategy in investing there?
Andrew Tan, Hong Kong

With the growing A-share bubble and the threat of stronger austerity measures by the Chinese government, would you still invest money in China today? If so, what do you think is the most prudent way to do so?
Clement Loh, Toronto, Canada

Can eastern Asia economic growth continue?
Grard Normand, Vence, France

Andreas Utermann: We believe Eastern Asia’s economic growth can indeed continue as the Asian economies increase intra-regional trade and also are seeing increasing demand from Europe and the Middle East. In that sense we believe a decoupling from the US economy is possible and has indeed already happened. The Asian economy accelerated throughout the economic downturn in the US that we have seen over the past 18 months.

That does not mean, however, that we believe one should rush headlong into the Chinese or Indian domestic markets, which we believe are currently on the expensive side. Buying during corrections would appear a better strategy. Also one should focus on the many companies globally that have an increasing stake in the region and would therefore benefit from the disproportion growth that we expect as a result as the secular trend of increasing prosperity in the region. We concur with the view that China will regain a dominant position in world GDP share over the next 20 years.

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What do you think the outcome of the weekend elections in France means for European markets?
Tony Tassell, London

Andreas Utermann: The outcome of the first round with Sarkozy in a strong lead is good news and if he wins the runoff as expected it will be even better news. With an unprecedented high voter turnout his mandate should be strong. Finally, progress on European reforms can resume – it had been previously been stalled by Chirac’s lame duck status – and there is realistic prospects of labour market and healthcare reforms as well as downsizing of government with a Sarkozy presidency.

Sarkozy’s opposition to Turkey joining the EU as a full member, if maintained in government could be positive for the euro on the margin. It goes without saying that an unexpected Royal victory would be negative for the European market as fears of protectionism etc would increase.

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