FRANKFURT (Reuters) - Renewable energy could be the next big theme for stock market investors, fund manager Jonathan Day at Morgan Stanley Investment Management said on Friday.
“Investors are thinking very much about what is the next big move ... (and) which sectors,” Day said. “Maybe we’ll see a resurgence of interest in green energy stocks.
“There is a definite push from governments around the world to continue to reduce greenhouse gas emissions ... and therefore companies that are focused on energy, in particular wind and solar, could be quite interesting longer term.”
For the time being Day is overweight in telecoms, consumer staples and pharmaceuticals.
“The problem with those areas is that they ... have outperformed very strongly already, so intuition says they probably will not carry on doing that for a long period of time,” Day told Reuters.
“We know that there will come a point where the market changes ... and those positions will have to be adjusted accordingly,” he said, adding it could be a little early to move into cyclicals, in which the fund remains underweight.
Top holdings include Swiss food group Nestle NESN.VX, which Day said has “good scope to gain market share” and oil major Royal Dutch Shell (RDSa.L), which just had good numbers and whose incoming CEO, Peter Voser, is a “safe pair of hands”.
Day’s European equity fund, with about $850 million (572.4 million pounds) in assets under management, tends to contain 30 to 50 stocks. It beat its benchmark, the MSCI Europe index .MIEU00000PEU, by 75 basis points in January and by 337 basis points in 2008.
The mayhem seen in stock markets worldwide, especially in the second half of last year when the MSCI Europe index lost 31 percent, has left many investors very cautious, Day said, but he saw a revival of interest in shares assuming the downturn doesn’t turn into deflation.
“I think people will re-allocate to equities. One of the big dilemmas is getting the timing right. If we do face a deflationary environment, then equities are not the asset class you want to be invested in,” Day said.
Hence many investors would wait to see the effects of central bank interest rate cuts and government fiscal measures aimed at stimulating economic growth and preventing deflation.
On average, European equities are trading at around 8 times long-term cyclically adjusted earnings, compared with a historical average price-to-earnings (P/E) ratio of 14.
“Valuation on a long-term basis looks quite supportive for the equity market,” Day said.
He said a more sustained improvement in leading indicators, a stabilisation in U.S. and UK housing markets and a recovery in consumer confidence could herald a pick-up in stock markets.
“We are obviously focused on trying to pick the turning point but if we miss the turning point by a few months it won’t be a disaster,” Day said.
Editing by David Holmes