Invesco fund managers Mark Barnett and Martin Walker are warning investors not to forget about the issue of Chinese debt. They believe that the topic has been pushed off the market's radar by a news agenda dominated by Donald Trump and Brexit, but the issue remains highly relevant.
Walker, who manages a number of funds including Invesco UK Equity (IE0030382802), says: ‘This was the driving force for the markets a year ago and was all anyone could talk about, which was painful given we were significantly overweight mining.'
CHINESE PROBLEMS HAVE NOT GONE AWAY
‘Now the focus is on UK domestic issues or Trump in the US but China continues to add more leverage and none of the problems have gone away. Will it go wrong? Ultimately it will but when I don’t know,’ the fund manager says.
Barnett, who took over from Neil Woodford as head of UK equities at Invesco in 2014 adds: ‘The Chinese have tried to pump up the economy which looked like it was stalling.’
‘On the positive side, most of the debt sits at central government, local government or corporate level rather than with consumers so there is scope to do something radical to clean the slate,’ Walker says.
Ultimately Walker’s contrarian call on the mining sector came good but he concedes the ‘party is probably now over’. ‘The sector looked undervalued, commodity prices were trading below cash cost of extraction and that level of price felt unsustainable. That’s not the case today, there has been a significant rerating of the sector,’ he says.
Walker is no longer overweight miners and prefers oil and gas, his biggest sector by weighting, and banks. The positive call on oil is based on a view on the oil price (Walker sees a $50 per barrel to $70 per barrel range over the next three years) and an assumption the likes of oil major BP (BP.) will demonstrate its yield is sustainable, leading to significant yield compression and thus a rising share price.
He also likes Royal Bank of Scotland (RBS) where management are ‘passionate about driving costs from the business’ and Lloyds Banking (LLOY) which is ‘now earning good returns which drive cash generation which in turn will drive dividends and make it a good source of yield.’
NICHE FINANCIALS FOCUS
His Invesco colleague Barnett is more positive on niche financial services operators such as sub-prime lender Provident Financial (PFG), recent Shares pick and litigation finance provider Burford Capital (BUR:AIM) and the London Stock Exchange (LSE).
‘I’m also happy to own insurance, particularly life insurance which offers exposure to the retirement of the baby boom generation,’ Barnett says.
