Personal Finance -- Your global investment strategy should be more than opportunistic investing and should not be based on dinner party tips, Douglas Johnson, vice president and portfolio manager of Merrill Lynch Asset Management, told the TMA Investment Products Services/Personal Finance Truth About Retirement seminars. The framework of your offshore portfolio should be structurally sound, although you should bear in mind that it is virtually impossible to be right all the time with any investment strategy, Charlene Clayton reports.
· Does the price of a share fairly reflect the fundamentals of the company?
· Is the economy growing? Very few countries are experiencing growth, so growth is the commodity which is in short supply. Investors are willing to pay for that growth and share prices will tend to go up; and
· what is the value of the share?
This does not mean you must make your evaluation strictly on the value of shares, but it helps to establish where you want to take your investments.
There's a misconception that if a market is expensive you should sell and if it is cheap, you should buy.
There are many reasons why a market is cheap and you may want to avoid it. On the other hand, a market may be very expensive but there may be other good reasons for buying into it.
Stock markets in the United States, Europe and even down in the doldrums Japan should be on your offshore investment target list, Johnson says. He says you should be invested in most of the large markets of the world most of the time to stabilise the performance of your foreign investments.
The United States, Europe and Japan are areas, for different reasons, worth your consideration this year.
He believes Japan could be this year's key place to invest; the United States has been doing well, although it does not mean it will be doing so a year from now.
He says that because prices are high in one market does not mean you should not invest in that market because there could be valid reasons for prices of shares continuing to rise.
Johnson says that you could consider being more heavily invested in European share markets which are providing some solid opportunities.
The reason why the Japanese equity market has not done well is a lack of confidence in the banking sector.
The Japanese equity market is the world's cheapest major equity market by some measures and if you have this kind of extreme, it tells you that there can potentially be a very strong rally in the market.
Japanese investors have about 65 percent of their household financial assets sitting in their banks earning virtually no interest, because of a lack of confidence in their stock market.
"If confidence was to return there could be a lot of cash moving into the equity market.
"It is impossible to say when this rally will begin, but you should have at least some of your money invested there now," he says.
On the other hand, prices in Europe are high but the region "is probably the single best opportunity for global investors this year."
If you take into account the lower risk of your investment, Europe is an extremely good opportunity.
There are three themes that will support the share market in Europe. These are the relatively weaker German currency; the formation of the European monetary union; and the restructuring in the European corporate sector.
The weaker Deutschemark:
A weak currency in itself is not bad, although the rapid decline or appreciation of a currency is a problem. A sustained upward or downward trend in the value of a currency creates different opportunities for different types of investors.
Over the past two to three years, the single most important driver of European equity markets has been weaker currencies.
When a currency is weaker, companies can be more competitive and can sell more goods offshore. The country's share market is boosted when companies bring back that money into local currencies.
Johnson says he expects the Deutschemark to continue to weaken over the next year. This means share markets will continue to do well.
European monetary union and the introduction of a single currency:
This should create more flexible labour markets and additional markets for businesses.
With high unemployment rates in Europe these new markets should create jobs.
Johnson says one of the most important indicators of confidence is the unemployment rate. And equity markets require confidence to sustain a rally.
Corporate restructuring in Europe:
Corporate restructuring taking place to fit in with a united Europe would lead to better profits, pushing up share prices.
European companies realise that to be globally competitive they have to build markets and productivity.
If European companies continue to restructure as they have over the past couple of years, then equity prices should benefit from the above average profit growth.