Ian Cowie joined The Daily Telegraph in 1986 and has been personal finance editor since 1989. He is @iancowie on Twitter.
China fund investors should mind the GAAP!
By Ian Cowie Your Money Last updated: March 4th, 2010
Rather than chasing last year’s financial fashion – emerging markets – investors might do better to look again at what was all the rage a decade ago; technology. Next Wednesday marks the tenth anniversary of the Nasdaq index of tech stocks hitting its all-time peak on March 10, 2000.
Since then, at its low-point the index fell to a fifth of the peak and trades below half its high-point today. Now John Chatfeild-Roberts of the £3.7bn Jupiter Merlin fund of funds is buying tech stocks for two reasons: “First, many companies in the sector are now in much better shape than several years ago with cash on their balance sheets and valuations that do not look excessive, yet the area remains unloved.
“Second, there is a good chance that the launch of Windows 7 will drive an upgrade cycle during the coming years. Vista was not that popular as an operating system and so most people are still using Windows XP which is several years old. As they replace their computers, this will lead to replacement of supporting hardware and software.”
His fund delivered double the average sector returns over the last five years, so his opinions are worth more than most. Mr Chatfeild-Roberts favoured ways into technology include holdings in the giant Henderson Global Technology unit trust and the Polar Capital Technology investment trust, which is trading at a 12.8pc discount to its net asset value. That demonstrates just how unloved this sector is.
By contrast, China is all the rage at present, having delivered handsome returns last year, but buyers today should beware that – according to data from Thomson/Reuters – shares in this emerging market are currently priced at more than 16 times earnings.
Elsewhere in emerging markets, Brazil is trading on a similar price/earnings ratio and India is even more expensive with a P/E of 20. Among the so-called BRIC nations, only Russia looks relatively cheap with a P/E of 13. For comparison, on the same calculation basis, the British market has a P/E of less than 12.
There are good reasons to expect higher rates of growth in BRIC economies than in the developed world. But followers of fashion might do well to consider what happened to those who piled into technology a decade ago.
Investors buying into volatile markets near their all-time peaks today should remember there is a big difference between the tried-and-tested strategy of buying growth at a reasonable price (GARP) and its suicidal brother; buying growth at any price (GAAP).
Tags: Brazil, BRIC, china, emerging markets, henderson, India, John Chatfeild-Roberts, Jupiter, Nasdaq, price/earnings ratio, Russia, technology, Vista, Windows 7