Investor of £1.9 billion: UK shares look ‘cheap’ but avoid Japan in 2017 Star investor: Investors should avoid Japanese shares in 2017

Andrew Bell, chief executive of the £1.9 billion Witan Investment Trust, which has increased its dividend for each of the past 41 years, has revealed where he is investing for 2017.

 Star investor:  Investors should avoid Japanese shares in 2017

Andrew Bell sees value in UK shares

Bell commented that the swift market gyration seen towards the end of 2016, where investors began to anticipate a rise in global inflation and rising bond yields is likely to continue in 2017.

He commented that while the policy of record low interest rates and quantitative easing served to prevent the global economy ‘sinking into a black hole’, it has not contributed to global growth.

Bell added that the policy, embraced by Japan and much of Europe of negative interest rates is ‘utter nonsense, paying money to lend to someone is paying rent on a house you already own.’

So he is generally optimistic that the change in tack towards greater levels of government spending will be positive for the US and the UK. He noted that incoming US president Donald Trump has asserted that he will increase spending and cut taxes.

Bell remarked that this is likely to be good for the US economy as the tax cuts are ‘more spent than saved’ by US consumers and corporate earnings increase.

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He believes that it doesn’t particularly matter if the extra spending undertaken in the US works, ‘as the portion of the stimulus that is spent by the government, the politicians is less important than the portion from tax cuts.’

Bell commented that as an investor he has maintained the gearing deployed by the trust despite the uncertainties of last year, as he feels that the change in policy from various government will be supportive of markets.

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Turning his thoughts to the UK, Bell takes the view that , ‘If Bank of England governor Mark Carney had waited another month he might not have cut interest rates as he did after the EU referendum result. It was an attempt by the governor to instil confidence in the economy, and if he had not cut rates and the economy hadn’t done well, pundits would have accused him of under-egging it.’

Cutting interest rates is designed to stimulate economic activity by dis-incentivising people and companies from holding cash, and instead encouraging them to spend and invest, which stimulated economic activity, which generates economic activity.

But Bell commented that having rates at negative, or exceptionally low levels may have served to create the opposite of the intended effect, as participants in the economy started to view the exceptionally low interest rates as a sign that all was not well in the economy, and so held onto cash.

Bell remarked that low rates had started to become a ‘symptom of the problem, rather than a solution to it. The reason I am quite optimistic for the year ahead is that I think it will be quite good for consumers, and less good for a lot of companies.’

The investor regards UK equities as ‘cheap’ in the current market conditions, but is underweight Japan and Europe.

The Witan Investment Trust invests in other funds, and at present the only exposure it has to Japanese shares is via global and Asian funds that may be invested in that market.

Bell told What Investment, ‘there are a whole generation of global equity managers who have made careers out of not investing in Japanese shares, and for all but about two of the past 25 years that has worked. Many global managers have regarded Japanese shares as a stagnant pond. When we are keen on Japan, we invest in a future {this means buying a product that goes up when the Japanese market as a whole rises} at the present time we are not invested in that future.’

Many investors are keen on Japanese equities going into 2017 as they take the view that the stronger dollar leads to a weak Yen, boosting Japanese exports. Additionally, when investors fear instability, there is a tendency for the Yen to rise, as it becomes a safe haven.

That is bad news for Japanese companies. But the renewed optimism that has spurred stock markets to new highs in 2017 implies that the Yen is not required as a safe haven.

Bell remarked that while Japanese corporate earnings may rise this year, ‘that may already be in the valuations.’

He is not keen on Eurozone equities remarking that, ‘it is not a market that looks particularly cheap. European equities generally trade at a discount to those of the US, but at the moment that discount is not as wide as it could be.’

Bell continued that the Eurozone is unable to follow the path of other developed markets by instigating tax cuts and/or an increase in public spending.

This is because fiscal policy is not run central by the European Central Bank.       

In addition, many economies within the Eurozone are already running substantial budget deficits and so have no capacity to increase spending.

Bell remarked, ‘The one country in the Eurozone that has the capacity to increase spending is Germany, and they have a law saying they must run a balanced budget.’

He concluded his comments with the remark that, ‘It is not the case that I think the Eurozone is going to blow up this year or anything, but there are easier routes to growth out there, in the US, the UK and Asia.’

The Witan Investment Trust has more than doubled investors money over the past five years, and presently trades at a discount to net assets of 5.5 per cent.  

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