European and Japanese equities top Lloyds hitlist

Markus Stadlmann, appointed chief investment officer at Lloyds Private Banking in September 2014, shakes his head ruefully when asked about prospects for developing countries at his offices in London’s Old Broad Street.

“Emerging markets doesn’t make sense any more as an asset class. There are huge differences in how one looks at regions and individual countries,” says the investment expert previously at Erste Group Bank and before that at rival UK bank Barclays. Before selling its Geneva operation, Lloyds advised £11bn (€15bn) in discretionary portfolios. But this was reduced by £7.2bn in April 2013.

“Country selection is a huge factor when investing in Asia, Eastern Europe and Africa. You have to be very clever about which markets you are investing in – the pure economic viewpoint is no longer decisive.”

The Indian market, for instance, has enjoyed very good performance for many years, despite poor economic data. “The economic success of a country is no longer a good enough indicator of where you should invest,” he confirms.

There are clearly “some challenges” for developing economies in the coming year, but Mr Stadlmann definitely has his favourites, while there are other former stalwarts he is avoiding.

India is most definitely on his current buy-list, due to economic reforms and companies profiting from “turnaround situations”. Indian financial services providers, infrastructure-related investments and technology are all on his radar within this “unfolding case, which will take years to reach its full potential. We are just at the beginning,” he believes. 

Indonesia, another fast-reforming nation, has also been the darling of many emerging market investors, but Mr Stadlmann has cooled slightly on the Jakarta story, not due to lack of reform, but because of lack of access to key investments.

“Indonesia is a much more complex political situation compared to India, especially considering how the opposition parties can affect the economy.”

It is more difficult for foreign fund players to buy into Indonesia firms, he says, with few companies that can benefit substantially from ongoing reforms.

In Brazil, which is currently going through a poor spell, it is the stalling of some of these crucial reforms, coupled with cyclical changes, that have led him to view the market more sceptically. But that does not mean investors should write off the previously thriving country, he says. “Brazil is clearly victim to the end of the commodities cycle. It has peaked and we have entered a longer-term bear market, which clearly affects the Brazilian economy as a commodities producer,” says Mr Stadlmann.

Issues of “huge corruption” around semi-public multinational energy giant Petrobas also deterred investors, as have “lack of progress from government reforms” under the leadership of latest president Dilma Rousseff. “[Previous president Luiz Inacio] Lula [da Silva] combined economic and social reforms. The current government has lost that perspective.”

There are however some brighter spots within the Latin American powerhouse, reckons Mr Stadlmann. “This is a hugely diverse market and some companies are interesting for us to buy,” he says, identifying positive indicators in the property sector.

“The Brazilian real estate market is at the beginning of a big breakthrough. It is still dominated by a handful of wealthy families, but they are playing a less significant role. There is huge potential in this very inefficient market. It is starting to develop the characteristics where we can put serious money to work.”

Real estate is also one of the strongest indicators of the health of the Chinese economy, which many investors are perhaps too cautious about, he believes. A strong fear of over-developed “ghost towns” without inhabitants can be over-emphasised, says Mr Stadlmann.

“China has developed huge areas with hardly any people in them when the buildings are completed. Look at Pudong [Shanghai’s business hub]. This was a ghost town when it was built. All these large buildings had no-one in them. Yet three years later, they were all full. This is just the Chinese way.”

It is vital for private bankers to be frequently travelling, visiting far-flung markets, he says. “You need to spend time on the road, meeting think-tanks and entrepreneurs. That is the only way you can really assess what is going on in these countries, not sitting in London staring at a Bloomberg terminal.”

Indeed, as we speak Mr Stadlmann has colleagues outside, waiting to whisk him away to the next meeting. He is certainly not one to be stuck for many days in the bank’s London HQ.

His on-the-ground relationship with Russian businesses is a case in point. Working at Siemens in the early 1990s, he was one of the first foreign investors to put together an Eastern European equity fund, when most Western investment managers were too wary to make the leap to the East.

“I followed the Russian story through the 1990s, not just in Moscow, but also the regions including Nizhny Novgorod, where I have fond memories of meetings with Boris Nemtsov,” says Mr Stadlmann, remembering the pioneering Russian politician and regional governor recently murdered yards away from the Kremlin.

But now it is much more difficult for foreign investors to build a positive case about Russian stocks, he says, preserving just “one or two positions”. Caution is very much urged at Lloyds. “You have to be very careful. I can’t embrace Russia as an investment case at the moment,” he says. “For the whole of the Putin era, I have had significant reservations about Russia.”

These were very much amplified after Russia’s invasion of Crimea, part of Ukraine, at the beginning of 2014, although things could have been very different if Europe and the US had reacted quicker, believes Mr Stadlmann.

The current situation of “fragile stability” has much potential to unsettle entrepreneurs and other foreign investors who may have been previously interested in the region, he believes.

Although an Austrian national, his family has Polish roots and he worries about the potential of the conflict affecting neighbouring economies. “Poland is aligned with the West and is very attentive to what is going on between Russian and Ukraine and the consequences for its economy,” he says.

Despite these and other geopolitical risks, he is broadly positive about equity markets, recommending overweight positions in Europe and Japan for the bulk of Lloyds’ private clients.

“Good things are happening in Europe economically,” believes Mr Stadlmann, although he would like to see consumer spending given a further stimulus by
governments across the continent. “Investment-wise, Europe is hugely attractive as profits are recovering in terms of timing versus the US and companies are so attractively valued.”

The UK stockmarket has “a lot of value to be found” too, although he studiously avoids comments about the UK political situation and election, following Lloyds Bank company policy on this issue.

Any electoral gains made by previously fringe nationalist parties across the eurozone should be a wake-up call to governments to reform faster, he says. “When governments don’t make enough progress regarding labour and pension measures, populist parties have an easy job gaining ground versus the governing parties.”

In order to maintain healthy economies and markets, without the risk of more extreme political influences, EU governments “need to do justice for both those of working age and pensioners,” he adds. “They can’t take away hard-earned benefits from retired people, but need to incentivise younger people to work.”

These reforms are still in their “early days” in the UK and their future will be very much determined by the post-electoral political climate. Amidst these uncertainties he expects modest market growth to continue. Capital protection is also important for Lloyds’ clients and it is not yet time to throw government bonds out of the mix, claims Mr Stadlmann. “Bonds are a conservative anchor for multi-asset class portfolios, but we will need to review them on a three-year time horizon.”

These portfolio decisions are made in conjunction with Aberdeen Asset Management, which has had an investment alliance with Lloyds since March 2014. 

“The rationale of the deal was to partner up with somebody whose sole business is asset management,” he says. “Aberdeen brings a wealth of expertise to Lloyds in emerging equities in particular, with specialism in the Asia Pacific region.”

The strategic alliance will last at least eight years, although it does not preclude other external managers being used to run client portfolios. Mr Stadlmann is a big fan of the multi-manager concept, which he helped establish at Barclays, farming out between 15 to 25 mandates to external managers.

And he expects the world economic situation to play out in favour of his choice of allocations. “If it’s not too hot and not too cold, then it’s the ideal environment for equities to continue to prosper as an asset class.”