Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Justin Oliver, investment director, Canaccord Genuity Wealth Management.
The key question facing investors is where to invest when so few assets currently appear cheap. We try to identify areas or sectors within markets that remain undervalued and/or that offer clear scope for growth. Here are three.
The first big opportunity lies in healthcare. One of the key growth drivers behind the healthcare theme is the fact that the first wave of ‘baby boomers’ has now reached retirement. In the US, they are therefore now eligible for Medicare (healthcare for the old), which in turn will necessitate increased government spending. From around 3% of GDP in 2009, the US’s Congressional Budget Office has estimated that spending will reach 8% in 2035 and 15% by 2080.
The healthcare theme is also a good way of capitalising on emerging-market economic development. Public healthcare expenditure as a percentage of government spending ranges between 7% and 11% in countries such as China, Brazil and Russia. However, it stands nearer 18% in Japan, Canada and the US. Thus healthcare spending in developing countries will almost certainly rise at an individual and governmental level and is highly likely to outpace income growth.
Meanwhile, despite its recent robust performance, the healthcare sector continues to trade at a discount to its long-term valuation averages. To play this area we like the Polar Capital Healthcare Opportunities Fund (020-7227 2700).
Another sector we like is technology. Technology stocks have recently underperformed, in part due to the (mis)fortunes of Apple. However, a restrained corporate investment environment and investors’ preference for defensive and less cyclical areas of the stock market have also played their part. The good news is that at least two out of these three headwinds will not persist moving forward.
Over the past five years, the vast majority of technology sub-sectors have outpaced the wider market in terms of generating earnings and sales growth. Most compelling, however, is the fact that these growth characteristics can be accessed at attractive valuations. Indeed, technology stocks are trading at their cheapest level for a generation.
The current sector price/earnings ratio is 12.9 times, against an average of 17.3 since 1988. Technology also has the highest free cash flow yield of any of the major sectors and is the only one with positive net cash on its balance sheet. The Henderson Global Technology Fund (0845-608 8703) is a relatively conservative way to invest in this theme.
Our final tip focuses on infrastructure. HICL Infrastructure Company Limited (LSE: HICL) offers investors a low-risk exposure to this asset class, while delivering an attractive yield of 5.3%. HICL primarily acquires stakes in social infrastructure projects, such as schools, hospitals and transport, and aims to deliver a long-term shareholder return of 7% per annum. The company’s revenue is government-backed and inflation-linked.
As at the March year end, its total portfolio was valued at £1.2bn, with exposure to 83 projects with an average remaining life of 22 years. In the current environment, a relatively high yield with low risk is attractive, particularly compared to the yields on offer on corporate bonds and much higher-risk, emerging-market debt.