I’ve said here before that I expect 2016 to be lacklustre for most real-estate investment trusts (Reits) and infrastructure funds, but there are some potential exceptions. The first of these is Grainger Trust (LSE: GRI), one of the UK’s largest residential-property owners. While I expect UK house prices to drift a little higher this year, this isn’t about house prices – it’s a mergers and acquisitions (M&A) story. Grainger’s estate would be a perfect fit for a pension fund looking to buy recurring income streams with an element of inflation-proofing. Some very active funds (such as Crystal Amber) have already bought in precisely for this reason. So I think Grainger will find itself in play this year.
It’s a similar story for German residential-property fund Taliesin (LSE: TPF). It owns several Berlin apartment blocks. Today’s open market value on most of these is well below their replacement cost. But in a recent chairman’s statement, Taliesin said that, once its portfolio had been converted from rental to leasehold (privatisation), its net asset value (NAV) would exceed €40 a share – almost twice the most recent (albeit quite historic) NAV reading.
Apartments in the first privatised block have gone for between €3,200 and €5,000 per square metre, compared to Taliesin’s average carrying value of €1,900 per square metre. At some point in 2016 I reckon a large institution, maybe a pension fund, will snap it up (as Blackstone recently did with Japan Residential Investment Co).
I also like the recently listed Schroder European Reit (LSE: SERE), which focuses on commercial property in major eurozone cities. The team behind the fund has a great reputation and I think its timing is about right – property in key cities in France and Germany should enjoy a strong 2016, both in terms of rental yield growth and rising prices.
The pick of global stockmarkets
Turning to global stockmarkets – I don’t think the US equity bull is done for quite yet, despite slightly scary valuations and slowing corporate cash flows. I think the technology sector in particular could go even higher before possibly crashing and burning in late-2016 or even 2017. The rise of the cloud (remote data storage) and machine learning are driving huge corporate IT upgrade programmes. Meanwhile, in health care, we’re seeing the first fruits of decades of investment in biotech, sparking a wave of M&A. So I’m still invested in the Polar Capital Technology (LSE: PCT) and Biotech Growth (LSE: BIOG) trusts.
Elsewhere, stick with trusted managers who can pick quality stocks with great brands and competitive advantages – the likes of Nick Train and his Finsbury Growth and Income (LSE: FGT) trust. Also consider the Sanditon (LSE: SIT) trust, run by Tim Russell, Chris Rice and Julie Dean. It’s a small pan-European long/short fund (ie, it can profit from selling stocks as well as from buying them). Critically, Sanditon owns a 20% share in the asset-management business behind the fund. The management group’s assets under management were £600m at the end of November. I think this will keep growing, and that this valuable stake will eventually be reflected in the trust’s share price.
Finally, if you have to be long any big developed-world market, opt for the eurozone, via JPMorgan European Smaller Companies (LSE: JESC).
A few for the contrarians
As for my outright contrarian plays – I am still very bearish on commodities. We need to see businesses reneging on bonds, a genuine mega-cap bankruptcy, and oil below $25 a barrel before we hit bottom, and I believe these things will all happen at some point this year. Until then, I’d be very wary of chasing anything in the sector. But the one exception is energy-focused listed private equity fund Riverstone Energy (LSE: RSE). Riverstone recently annoyed some big investors by running a large share placing at a discount to NAV. But the logic for this fundraising is sound.
The fund’s managers argue that the collapsing oil price has unleashed a wave of potentially very big opportunities to buy solid assets at competitive prices, which should hopefully rise in value hugely over time as oil prices rebound.
Last, but not least, I’m still betting that the right businesses and governments in Asia will continue to get their balance sheets into shape this year. Japanese smaller caps might be worth a look – Baillie Gifford Shin Nippon* (LSE:
BGS) would be the best play here – but overall I’d stick with my core Asian holding, the Asian Total Return (LSE: ATR) trust, which should continue to outperform in 2016. I also remain long-term bullish on prospects for emerging-market infrastructure – I’m a long-term holder of the Utilico Emerging Markets (LSE: UEM) trust, by far the best way to play any possible upturn in emerging-market equities.
* MoneyWeek’s editor-in-chief, Merryn Somerset Webb, is a director of the Baillie Gifford Shin Nippon investment trust.