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OMGI 2015 outlook

China has some juicy catalysts that could drive the mainland markets, which currently have companies with cheap valuations, according to Old Mutual Global Investors.

John Ventre, head of multi-asset at OMGI, believes that investors in the Chinese market can capitalise on the tumbling oil price and lower import costs as the commodities sector experiences dropping rates on a global scale.

“The Chinese market has been cheap for a very long time,” said Ventre. “At our heart we are value investors, so we have liked it for a long time.

“It has some potential positive catalysts – the first is weaker commodity prices. China is a big importer and what has been driving commodity markets for the past decade. Cheaper prices, lower import costs and improved corporate profitability means we expect Chinese profits to improve off a cheaper oil price.

“The second point is interest rate cuts. The central bank there seems to have begun a loosening cycle in terms of monetary policy. The combination of stronger earnings per share growth and an improvement in liquidity conditions on top of a market which is exceedingly cheap. What more could you ask for?”

Ventre has been continuously increasing his Chinese equity exposure throughout 2014 across the Old Mutual’s Spectrum, Voyager, Foundation and Generation platforms.

“Our weight has been building through the year,” he said. “We have been overweight a while. The last slice was about a month ago as momentum started to turn positive. As a proportion of our global equity weight we are about 10% overweight, up from about 7 or 8%.”

Ventre also marked UK large-caps as attractive, as a result of the recent drop in sterling from 1.7 to 1.55, but more compelling was his singling out of Brazil equities as a market to watch.

While he is not acting immediately, Ventre said that the close-run presidential election in early October leaves Dilma Rousseff with an important decision to make, and one he will be watching closely.

“The only market we are looking at as a kind of ‘X-factor’ is Brazilian equities,” he explained. “While we are not bullish now, it is possible that Dilma had enough of a shock in her most recent election campaign that she might see that as a wake-up call. If she moves to a more centralist agenda – fewer subsidies and more reward for investment – that would be very good for Brazil, and there have already been a few steps in that direction.

“There is some risk [of Brazil losing its investment grade rating]. Brazil is already priced as if it’s not investment grade, so if it doesn’t lose it I’d describe that as bullish and if it does then that is expected.

“We are observing events. We definitely see some value there and would go for broad-based Brazilian exposure.”

Part of the Mark Allen Group.