Merrill Lynch unveils best ideas

The ‘rocky time’ expected for 2008 is offering some interesting investment opportunities from undervalued assets, according to Gary Dugan, CIO of ­Merrill Lynch Global Wealth ­Management, EMEA. “Today, our major discretionary accounts are underweight equities,” he said, adding that in their absolute return strategy the equity exposure, currently about 35 per cent, in a really positive ­environment could be as high as 70 per cent. “But it is time to start rebuilding investors’ portfolios towards a more substantial equity holding, and we are prepared to buy,” he said. Mr Dugan shared four key investment themes with PWM:

• In Japan, the fundamentals of the consumer and the banking system are stronger than generally thought, he said, and the tremendous ­underperformance of the Japanese ­market makes it an attractive ­proposition to investors.
• In terms of industry sectors, ­pharmaceuticals has underperformed ­significantly and valuations are now well down below the market, said Mr Dugan. “In the next couple of years, this huge increase in spending on research and development is likely to see a pay-off. And in the current ­market environment, the ­defensive qualities of these companies, with strong ­dividend growth and share buy-back ­programmes, is very supportive.”
• Within the commodities sector, the new ­recommendation is to buy gas, which is underpriced relative to oil. Agriculture products are also ­recommended, as strong demand from China and India will drive prices of these products higher.
• While there is some caution on emerging markets, where inflation is a problem, there is a new emphasis on the Middle-Eastern market, said Mr Dugan. “Interest rates are going lower, property markets remain relatively strong, population is growing quickly and evaluations are quite reasonable.”

Funds are the preferred investment vehicle for these undervalued assets. Active managers do well in this kind of environment, he said. “When you are really searching around for companies that do well in difficult ­environments, that’s where the fund management industry typically adds value.” Funds are also the selected vehicle for investing in soft commodities, to “actively manage the problem of what contract you buy, when you sell it, and when you trade it”, added Mr Dugan.