We are global investors conscious of the need to repatriate returns. Our mandate is to select the best global dance partners to ensure that portfolio returns shine under the spotlight.
Record oil prices and energy earnings brought China to the front page. Currencies continued to reflect the influences of global economic rebalancing. Our Overweight calls on Energy and Japan and Underweight call on the U.S. performed well.
We continue to utilise a rebalancing of economic wealth, growth, and activity away from the U.S. toward Asia as a guide for our investment decisions. In 2005, we favoured a defensive stance. We see opportunity in Japan and select emerging markets. Long-term, economic rebalancing is particularly bullish for metals, energy, and food - the stuff the earth provides.
Three long-term cycles provide a roadmap. The U.S. market remains range-bound; commodities are 2-years into a multi-year cycle. Profit, inflation, and liquidity cycle indicate a defensive posture is appropriate.
Underweight U.S.; Overweight Japan. U.S. profit cycle has run its course and productivity has peaked. Japanese corporate and dividend reform are likely catalysts in 2005.
Moving to Neutral on China from Underweight; Overweight strong GDP geographies such as Emerging Asia, Advancing Eastern Europe, internalising South American economies.
Canadian corporations will remain challenged by a strong currency. We will always be overweight Canada, so our job is to manage risk. Income trusts are closing in on 10-year government bond yields, indicating high risk. Recent energy action is indicative of mania behaviour - buy on weakness.
Dividends and Sectors
We are strong believers in dividend growth and believe dividends will contribute significantly to 2005 returns. What global sectors indicate the greatest dividend growth at the best value? Energy, Materials, Telecom, Agriculture.
Developed markets will correct on a profitability peak, particularly in the U.S. Chinese economic growth will continue to be strong, putting pressure on supply-constrained commodities it requires. This will benefit emerging market commodity exporters the most. The anticipation of Japanese corporate reform will drive asset values higher. U.S. dollar will be stable to up.