Morgan Online, 20 December 2011
Gareth Morgan, Director of Gareth Morgan Investments
What was it like to be an investment manager in 2011?
It was like being on a razor’s edge all year. We started the year facing rising oil prices, inflationary pressures and fears of slowing growth in the emerging economies of the world, followed up by the tragic events of the quake and tsunami in Japan. Aside from the devastating human impact, there was a significant loss of economic activity from the damage to Japan’s production facilities. Markets went into a tailspin and while this sell-off created some value opportunities in quality stocks, we were careful not to dive in boots n’ all given the likelihood of soft trading conditions persisting through the year.
Clouds were already starting to gather over the prospects of the US recovery continuing. The recovery stuttered, in fact, and at that point we really had no idea whether it was going to be a double dip recession or just the pause that refreshes. To boot, the animosity between the Republicans and Democrats made the chance of any significant initiative from the White House to cap the US government deficit track nigh on impossible.
And then of course there was Europe to contend with. Holy moly! This was the smoking gun from the Great Financial Crisis. European governments had stepped in to rescue their banks and others that needed someone to take over their bad loans. But many European governments were living well beyond their means themselves and had accumulated awful debts. So adding bad private loans just meant these governments’ balance sheets looked like shite. Consequently the market has pounded European shares this year, and it is still not certain that the EU can save itself. We have kept a relatively low exposure (70%-80% invested) to share markets through most of 2011, and that has helped cushion the blows.
Finally on the excruciating experiences of 2011, it is evident that emerging markets (to which we have a reasonable exposure) have been banged hard by events in the US and Europe. While that has hurt us, a decent dollop of defensive stocks and big global brands has helped to dull the pain.
What was the worst thing that happened from a portfolio perspective?
Without doubt emerging share markets. We did not expect that emerging markets would be so badly affected by events in Europe and the growth stutter in the US. While the emerging economies have generally trucked along, share prices in those markets have been pummelled, certainly more than we had expected.
What was the best thing that happened?
Our preference for solid, blue chip, global companies has been an offset to the slump in emerging share markets. Thank goodness we didn’t go rushing back into banks, and also tempered our appetite for commodity stocks, which have sagged. Those decisions helped keep our performance respectable through choppy and sideways moving markets.
Do you think we are in for a repeat in 2012?
Europe remains ugly and unless policymakers take more effective action than they have to date, the threat of a dangerous recession is uncomfortably high. November 6 next year is election day in the US. There is a real risk that the government deficit will blow as Mr Obama tries to “buy” another term as president. Markets would convulse at that. China looks like it’s headed for a soft landing thank goodness. But all in all we’re looking at dull economic growth. Our priority will be looking for companies with sustainable earnings at the right price. We are not seduced by the prospect of a sudden global recovery.