AGF global manager favours Far East markets

Japan's growth streak is a pleasant surprise, says Stephen Way.

Diana Cawfield 11 January, 2018 | 6:00PM
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When it comes to global equity opportunities in 2018, Stephen Way favours the Far East, especially Japan.

"Certainly, one of the surprises has been Japan, in terms of sustainability and basic economic growth," says Way, a senior vice-president and portfolio manager at AGF Investments Inc. in Toronto. "They just registered their second-quarter GDP of 2.2%." He adds that the country has had the longest sustained positive economic growth in more than a decade.

Way considers Japan to have solid stock-market fundamentals and attractively valued individual stocks. Among AGF's Japanese recent stock holdings are Keyence Corp. (KYCCF), whose products include sensors and measurement systems, and Nippon Telephone & Telegraph Corp. (NTTYY).

Way heads the global equity team that manages the Morningstar 4-star-rated AGF Global Equity Class. Their responsibilities also include AGF Global Dividend and AGF Emerging Markets.

AGF's positive outlook for Japan is based on its allocation framework for 18 to 20 countries. That framework is driven by valuations, growth sentiment and risk factors.

If a stock market scores favourably in terms of attractive valuations, and where growth and sentiment are positive and where risk is low, it would meet the criteria for an overweight position relative to the global fund's benchmark, the MSCI All Country World Index.

Another Asian market that is rated highly by AGF is South Korea, based largely on cheap valuations, including relatively low price-to-forward-earnings ratios. AGF's main holding there is Samsung Electronics, "which has done phenomenally well," says Way.

As for China, the largest Asian economy, Way expects strong growth in the near term. "We think Chinese economic growth will continue to be north of 6%," he says, while conceding that there are debt issues to deal with. He notes that one policy response by the Chinese authorities is to impose restrictions on property loans.

AGF reassesses its country allocations every month. Once the team decides on its country weightings, its research focuses on individual stock selection. Way says the holdings that make it into the foreign equity mandates have a quality focus with a modest value bias.

Overall, Way believes synchronized global growth will "absolutely" continue and will be broadly based, with Europe, North America and emerging markets all participating. He says Europe has surprised on the upside, with strong rebounding growth in countries like France, and with Germany also doing very well.

Way says the emerging-markets rally in 2017 was very narrow, led by a few sectors and a few countries. "But the economic fundamentals of emerging markets are pretty good and valuations are attractive," he says. "We think that emerging-markets currencies are very competitive, which should allow for exports out of emerging markets to continue to grow, given the competitive backdrop."

From a sector perspective, the 26% weight in financials and 21% in industrials in AGF Global Equity has been at roughly these levels for the last two or three years, says Way. "We've seen good opportunities across financials and industrials, more so than some of the other cyclical sectors," he says. "Certainly, financials have helped us in the United States over the last 12 months, given the focus on deregulation."

For example, with interest rates rising, some of the U.S. banks have done very well. Banks like  JPMorgan Chase & Co. (JPM), says Way, which is one of AGF's largest positions in foreign banks, and Moody's Corp. (MCO), a credit-rating agency. "Moody's has exhibited very strong growth over the last 12 to 24 months."

Within the industrial sector, one of AGF's favoured stocks is U.S.-based  Northrop Grumman Corp. (NOC), an aerospace and technology company whose products include military aircraft and missile-defence systems. "Northrop is really an opportunity to participate in acceleration of defence spending," says Way, "that we forecast over the next several years."

Another U.S. holding is  Honeywell International Inc. (HON), a diversified technology and manufacturing company that is also a player in the aerospace industry. "Honeywell is a company that's been able to expand its operating profit margins and sales at a very steady pace over the past many years," says Way. "We're forecasting there could be a modest revival in capital spending over the next 12 to 24 months, so Honeywell would benefit from that."

Way attributes the positive outlook for global growth, in part, to the relatively low cost of money. "The low, pretty much zero, interest-rate environment in many parts of the world has helped to underpin the growth in a lot of different economies."

Despite an overall positive outlook, Way is cognizant of political and economic risks. "There's the risk of a central-bank policy error that many countries face," he says. " I think geopolitics in 2018 will also be a challenge, whether it's U.S. President Trump and his presidential team and the actions he takes, whether it's the uncertainty associated with Brexit, or Italian elections. Those are all risk factors, and there's also North Korea and what happens there."

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Honeywell International Inc186.18 USD-0.50Rating
JPMorgan Chase & Co147.73 USD0.09Rating
Keyence Corp372.50 USD-1.19
Moody's Corporation319.95 USD0.47Rating
Nippon Telegraph & Telephone Corp ADR29.79 USD-1.23
Northrop Grumman Corp439.25 USD-0.06Rating

About Author

Diana Cawfield

Diana Cawfield  An award-winning writer who has been a regular Morningstar contributor since 2000, Diana's numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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