A professional investor tells MoneyWeek where he'd put his money now. This week: Makis Kaketis, manager of F&C UK Dynamic Fund.
Since May, equity markets have reappraised how they price risk. Unlike the market correction in 1997, when the value of bonds and equities slumped simultaneously, the 2006 correction has so far been confined to equities and can be attributed to inflationary fears and concerns over global growth. In periods of uncertainty, it is natural for investors to turn to defensive stocks. However, there are other, less obvious opportunities.
For the world's largest inter-dealer broker, ICAP (IAP), the uncertain economic environment has proved beneficial in the short term. An increase in volatility has meant raised trading volumes. In the long term, two factors will help the firm deliver strong numbers. The first is the acquisition of EBS in June this year, which will provide ICAP with growth potential and significant economies of scale. The second is the wider use of electronic dealing. Previously considered difficult to understand, these products have undergone a transformation and become a vanilla offering. This will continue to boost take-up across the industry.
Another sector that has been unfairly treated is mining. Some investors have pulled out, and yet the mining index has recovered more than other so-called higher risk' sectors, such as insurance. There is a good reason for that. Mining, unlike other cyclical sectors, derives a large portion of its gains from structural factors, rather than from the traditional consumer-led cycle. This comes mainly from infrastructure spending in emerging markets, particularly China and India. The industrialisation of these economies is likely to continue for some time, driving up demand for mining and other related sectors.
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Makis's top investments: buy zinc and gold
Zinc is one commodity that has caught my eye. It shows every sign of knocking copper from the top spot in 2007 and, as of next year, Zincox (ZOX) looks set to become the lowest-cost producer of zinc on a global scale. What is more, demand for zinc is not as driven by exchange traded funds as it is by industrial demand. Zincox, which extracts zinc from harmful electrical furnace dust, has also benefited from political environmental pressures, recently signing 15-year deals with the US and Turkish steel industries.
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Another strong play is gold. Gold is benefiting from the two-pronged effect of income growth in emerging markets and a reappraisal of gold as a store of value in an increasingly volatile political environment. By 2009, Peter Hambro (POG) promises to produce more than a million ounces of gold a year, counting itself among the top ten gold producers globally. Canada-based Kirkland Lake Gold (KGI) is reaping the benefits of improved extraction technology with lower production costs, and with many untapped gold reserves available, it has huge potential to increase exploration. Perhaps most importantly, the firm is operating out of a safe haven, and is less likely to be affected by political or economic crises.
Makis's top investments: the Magners craze
But for those of you who are tired of hearing about market volatility and need a drink to quench your thirst in the recent hot weather, C&C (CCR) is a name to remember. Unless you've been out of the country or religiously avoid pubs, then you will have noticed or been a willing participant in the latest drinking craze to hit the UK: Magners Cider. I believe C&C will continue to build market share in the UK ahead of City expectations.
The stocks Makis Kaketsis likes
12mth high 12mth low Now
ICAP 576p 309p 461p
Zincox 298p 128p 220p
Peter Hambro 1,750p 640p 1,314p
Kirkland Lake Gold 487p 172p 336p
C&C €8.67 €4.10 €8.66
