Offshore perspective

Freelance writer Leon Kok has just returned from three weeks of extensive meetings across the US with investment bankers, stockbrokers, fund managers and businessmen. He is convinced that 2006 is set to be another good investment year both internationally and locally.

The case for diversifying into leading rand denominated global equity funds is pretty compelling.

Global real economic growth may slow down slightly next year, but the US economy can be expected to hold up reasonably well, the Asian Pacific economies ought to steam ahead, Japan will probably continue to surprise, and unlike others, I'm not pessimistic about Europe either.

In the US there is no doubt that the consumer will continue to be the engine of growth. Consumer confidence is still at three-year highs accompanied by rising home sales and considerable debt-driven growth, and while at some time consumer retrenchment will have to occur, it's unlikely to be in the immediate future.

The current 15 to 16 price earnings multiple (PE) on Wall Street is slightly stretched, but ought to look better next year with further earnings growth. We aren't looking at a bubble period where multiples are in their 20s - we're looking at what appears to be a fairly attractive situation. The past five years have been the nirvana for value investors; now investors need to move on and look for under-valued growth stocks. The US is particularly rich in new economy-type companies and more traditional stocks, and that's where the action is likely to be.

Japan appeals where shares are powering ahead and have risen to their highest level in more than fours years and I expect this to continue. Contributing to the momentum was a good election result in August, higher consumer spending, increased private capital investments, and higher exports. The Nikkei 225 Index is more than 25% up on its low earlier this year, but still some 60% below its record high.

On the downside deflation hasn't been wiped out. Taxes will have to be increased to cope with Japan's huge national debt and some American analysts argue that the financial system isn't creating sufficient credit to fuel the economy. Higher oil prices are also squeezing it.

Valuations in Europe remain particularly attractive with an average 13 PE, in spite of individual markets having gained significantly on their 2005 lows. I'm particularly attracted to sectors where dividend yields are higher than those of bonds, especially in the finance, energy and healthcare sectors.

Venture funds are pouring into Germany. Ian Armitage, HgCapital's CE, says that there are simply too many opportunities to avoid it. Once virgin territory for private equity firms, the German market is seeing an incipient gold rush for undervalued companies by an industry that is flush with cash and on the prowl.

David Rubenstein, co-founder of Carlyle Group, one of the leading US private equity firms, agrees. "Germany is the hottest place to seek deals in Europe. Europe is more attractive than the US and Asia, where there are fewer opportunities for restructuring".

Most investment houses that I met with in New York, Denver and Houston prefer equities to bonds, pointing out that despite the recent rise in global long bond yields, real yields remain low. Besides, it's widely felt that bond valuations are vulnerable should inflationary expectations deteriorate, and force central banks to increase interest rates more than originally expected.

In the US the spread between two-year and 10-year Treasury yields has narrowed to just 11 basis points, the lowest in more than four years. A year ago the gap was 135 basis points. Inflation worries have pushed up market rates across the board, but the Fed's continued rate hikes and official statements that it won't accept a return to the high inflation of the late 1970s has prevented long-term rates from rising even further.

Significantly, the US market has been attracting increasing numbers of investors from the UK, Europe, Japan and China because they're able to get better fixed interest returns than they'd get in other places. Ten-year government bonds are yielding only about 3.5% in Germany compared with 4.5% in the US. So long as the dollar remains relatively strong, US securities will remain a good bet.

Interesting though is that most experts I spoke to expect the dollar to decline by about 9% against the euro and the yen by the end of next year, but they believe that US interest rates will stay well above those in Europe and Japan. This will continue to attract foreign capital to higher-yielding US assets. A weaker dollar is seen to be vital in correcting the trade balance.

In recent years high yielding offshore bonds (junk bonds) performed particularly well, annually generating around 6% in hard currency coupled with quite a bit of capital appreciation. In the US alone foreigners are currently investing in corporate bonds at the rate of $50 billion a month.

Leon Kok writes for publications in the United Kingdom, the United States and Switzerland, in addition to local periodicals such as Finance Week. He writes in his personal capacity and views and comments should not be considered to be advice. If you are unsure which unit trusts to invest in please consult a financial advisor.