Investec GSF Global Opportunity Equity and Investec GSF Global Franchise manager Clyde Rossouw expects financials and many value stocks to underperform in 2013 as deleveraging continues in developed countries.
Euro Stars A-rated Rossouw believes that a short term focus is leading too many investors to chop and change too readily in their search for returns, and has led to a raft of stocks highly correlated to market movements screening as value.
He told investors: 'We have no idea how some of the major macroeconomic events will play out. There are debates over inflation versus deflation and the ongoing deleveraging in the Western world means in our view that leverage as a general principle will not be rewarded.'
'This should lead to financial sector underperformance and value (too many high beta names screen as value) and a re-valuation of quality growth.'
'Sector rotation calls occur frequently, as investors largely seem incapable of taking long term views, and always want to buy racier stocks in more buoyant markets. Such a strategy involves selling defensive winners to buy cyclical higher beta names, but typically ends badly.'
This stance has led him to remain long on quality equities and short on investment banks which he believes are coming under ever increasing pressure from a raft of regulatory and economic concerns.
'The financial sector market capitalisation is too high relative to the sustainable profits that can be made over time, hence consolidation and underperformance seems likely, particularly if investment banking is separated from commercial and retail banking activities.'
US to remain strong
Rossouw also takes issue with the widely held view that the US dollar will experience weakness going forward as he expects the US to continue to be the best performing developed market despite its fiscal cliff issues.
However, this continuing strength is bad news for gold, commodities and emerging markets.
'The market expects US dollar weakness. This seems at odds with expectations for a recovery in US manufacturing, shale gas discoveries, modest property market growth, good demographics and robotics will, we believe, drive a multi-year expansion in the US trend growth making it the best developed market.'
He added: 'The [US Federal Reserve] has taken a strong position regarding unlimited quantitative support for economies and markets.'
'This is significant in that it supports the US financial balance sheet through an emphasis on markets, a deliberate attempt to prevent the dollar from appreciating, subtle renewed inflation creation focus, and a control of borrowing costs through keeping long term interest rates low and making savers subsidise borrowers.
'These actions should spur renewed interest in equities, where the valuation gap is large to bonds, and within equities the gap between income-generating, stable, growth businesses is even larger when free cash flows are compared.'
Rossouw is keeping the fund's portfolio relatively defensive as he sticks with his low turnover and focus on quality names but he is starting to see some value emerging in some more cyclical consumer discretionary stocks and luxury goods stocks in particular.
'Where stocks screen attractively on mid cycle free cash flow yields, and supported by great operating metrics, we become interested. We expect to make investments selectively in this [luxury goods] area.'
Since taking on the Investec GSF Global Opportunity fund in December 2010, Rossouw has returned 20.8% compared to 8.8% by the MSCI AC World benchmark to the end of December.