This year may turn out to be psychologically similar to last year for investors. Last year was marked out by shocks, followed by slowly receding fears. We saw the first half dominated by concerns of a US and Chinese slowdown, yet the data surprised positively throughout 2005 and these concerns abated.
Looking ahead, the market's bogeyman for 2006 appears to be inflation. But we think fears of rising prices are unwarranted. Based on our analysis of global trends, we think that inflation could be lower than expected in the second half of 2006. Globalisation, deregulation and increased international competition suggest to us that deflationary forces in intermediate and manufactured goods will override inflationary forces from raw materials, making deflation more of a worry than inflation in the longer term.
At Neptune our investment team looks at the market in terms of global sectors, and our fund can invariably find exposure to growth stories regardless of the location of that growth. An example is our conviction of the need for investment in ports. Ports are a prime example of an unfashionable but essential industry that suffered during the mis-allocation of capital throughout the dotcom boom. China, India, Brazil and Russia are now changing global trade patterns and driving port-based capital expenditure. Cargotec (CGCBV, €29.40) of Finland is well positioned to benefit from this growth, being a leader in specialist cargo-handling kit.
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Aerospace is another favourite sector. Boeing (BOE, 4,146p), Airbus (80% owned by EADS, ticker EAD, €32.22) and Rolls-Royce (RR/, 435p) have an average delivery forecast of 20,000 mainline aircraft over the next 15 years. To put this into perspective, the total global fleet in use today is 15,000. We also like some of the engine manufacturers, particularly the Snecma business within Safran (007327, €20.5) of France.
Otherwise, we remain convinced by the oil story. But as the short-term direction of the price is influenced by excessive speculation and volatility, focus on oil-service firms. Here, there is great earnings momentum, regardless of the movements of the oil price, due to the upswing in capital expenditure by integrated oil firms. We think stocks such as Technip (TKP, $60.78) remain compelling.
We are also very much believers in emerging Europe, particularly Russia and Turkey. Russian wage growth is running at 20% per year and this is creating a growing middle class that is eager to spend. This continues to create great opportunities. At present, we are trying to find Western-listed businesses with an eastern European footprint and growth profile. This gives the best of both worlds, with the good long-term growth of the East and the risk-profile of the West.
On the macro level, Germany looks like it is pulling itself out of the quagmire. We are not convinced by the doomsayers who forecast a pull-back in consumption. With savings rates at near all-time highs and the beginnings of an improvement in unemployment, we see the balance of risk becoming more positive and are following the residential property market closely. Greece is another market where we see numerous under-researched and interesting companies, particularly in the mid-cap sector. In sum, there are plenty of profitable opportunities in Europe and we approach the year with quiet optimism.
Rob Burnett is manager of the Neptune European Opportunities fund. See www.neptune-im.co.uk.
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