Fund manager Hans van den Berg is optimistic about the outlook for global stock markets this year.
"Inflation remains fairly low; interest rates - even though central banks have been raising them in the United States, in Europe and even in Japan - are still fairly low [and] bond yields are generally lower than earnings yields," said the lead manager on the TD International Equity Growth Fund.
Moreover, "earnings growth is still present in almost every equity market around the world; so that is a very supportive set of factors for continued positive returns in the equity markets," added the managing director of Morgan Stanley.
Michael Hillman, a secondary manager on the fund, noted merger and acquisition activity is still quite high. M&A activity in the first quarter of this year was up about 10 per cent from a year earlier. That also is boosting stock markets.
The $640-million fund is broadly diversified across global markets. It does not invest in the U.S. but does have one Canadian holding - EnCana Corp.
"We actually see great investment opportunities around the world - in Europe, in Japan, in emerging markets and in Asia outside of Japan," Mr. van den Berg said. But the fund is underweight Britain.
"It is just that we see better opportunities outside the U.K.," he said. For example, the banks are a big factor in the British market "and we just feel that lending growth to both businesses and consumers in the U.K. is slower than lending growth, for example, in the former East Bloc," he said.
Currently, Japan is the most heavily weighted country in the portfolio, but some of the holdings there were trimmed last year, including those in Toyota Motor Corp., specialty steel producer Kobe Steel Ltd. and tractor and lawn mower maker Kubota Ltd., as the managers believed they saw better value elsewhere.
The stocks are chosen on a bottom-up basis.
Shares of Sumitomo Realty & Development Co. Ltd. (8830-Tokyo), a Tokyo-based developer, set a sizzling pace in the first quarter, returning 18 per cent measured in U.S. dollar terms, far ahead of the overall Japanese market, which returned 3.56 per cent on the same basis, Mr. Hillman said. Land prices have started to improve in Tokyo and vacancy rates for quality office buildings have dropped to around 1 to 2 per cent, Mr. van den Berg said. Moreover, rents have risen "tremendously."
Continental AG (CON-Frankfurt), a German high-performance and winter tire and automotive parts firm, is the fund's biggest holding. Mr. van den Berg said Continental was the first firm to move tire production from high-cost areas such as Germany to lower-cost countries such as Romania, giving it a cost advantage. "Since tire production is sort of a slow cyclical growth area, they have moved into faster growing areas" and have become market leaders in electronic braking systems, electronic stability control and other safety-related features, he said. "So they have a stellar record of continued growth in what would appear to be a more cyclical business," he added.
Keppel Corp. Ltd. (KEP-Singapore), operates through three divisions - offshore marine, property investment and infrastructure, including waste disposal - but the main driver of revenue and profit growth last year was the construction of offshore rigs, Mr. van den Berg said. Keppel's order book for offshore rigs "has exploded over the past year, so now, they are basically booked solid for the next four years and that has led to a much better pricing environment," he added.
E.ON AG, (EOA-Frankfurt), another of the top 10 holdings, is the leading electricity generator and gas distributor in central Europe. Mr. van den Berg said E.ON had tendered an offer for Spain's Endesa SA power utility, but instead of entering into a bidding war, made a deal to buy parts of Endesa. E.ON's "balance sheet is so strong, they will have money left over after acquiring these assets ... which will also allow them to buy back stock."
© 2007 The Globe and Mail. All rights reserved.
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