AppId is over the quota
AppId is over the quota
By Laurence Fletcher
LONDON | Thu Oct 6, 2011 10:36am BST
LONDON (Reuters) - Defensive stocks in sectors such as telecoms and utilities offer "outstanding value" and are set to benefit as investors switch out of over-priced government bonds, said Armstrong Investment Managers' Patrick Armstrong.
Armstrong, whose London-based firm manages 251 million pounds in assets, said the telecoms, healthcare and utilities sectors had been hit by "indiscriminate selling" by index investors, and said he had added to telecoms holdings on Tuesday.
"Investors are destroying the real value of their wealth with bonds which yield significantly less than inflation," Armstrong, who is joint managing partner and head of investment selection at the firm, said in an interview late on Tuesday.
"We expect a rotation out of these bonds into high-yielding equities, which have stable earnings and cash flows," he said.
According to Armstrong, Western economies are heading for stagflation -- an unhealthy mix of economic stagnation and inflation -- as governments and central banks continue to try to revive their flagging economies.
This is set to make government bonds -- in which investors have taken refuge from this summer's financial market woes -- less attractive, he said.
German 10-year bond yields have dropped below 1.8 percent from above 3 percent at end-June, while 10-year Treasury yields have fallen to less than 1.9 percent from 3.2 percent.
Euro zone inflation, in contrast, rose unexpectedly to 3 percent in September, its highest level in almost three years.
The STOXX Europe 600 Utilities .SX6R index is down 13 percent since end-June and is on a price/earnings ratio of 9.9 times, for instance.
"France Telecom (FTE.PA) is on less than three times cashflow. Even if there's no growth again ... you get the cash in less than three years. And there's a dividend yield of 12 percent," said Armstrong.
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Armstrong has bought shares in luxury goods companies CF Richemont (CFR.VX) and Tiffany (TIF.N) in recent days, as well as in drinks giant Coca-Cola (KO.N), believing emerging market demand can drive earnings growth even as Western economies slow. Such companies now account for 4.8 percent of his fund.
"At 13 times earnings there's still potential for earnings growth if we don't have a global recession, and just have a Western recession," he said. "In China the lower-middle class view it (Coca Cola) as a luxury good."
He has also added to his holdings in livestock, betting that a drought in the U.S. midwest that sent corn prices soaring and forced farmers to slaughter cattle will feed through into higher livestock prices.
Corn soared above $7.50 a bushel in August, up from around $4.30 a year before, while cattle has risen around 20 percent over the same period.
"Eighty percent of livestock prices can be explained by corn prices from 12 months ago," he said.
Armstrong still has positions in gold, silver and platinum, even though in the short-term he thinks assets perceived as safe havens are in a "bubble-like status." Long-term he thinks they will benefit from money-printing by Western governments.
(Reporting by Laurence Fletcher, editing by Sinead Cruise and Jane Merriman)
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