Legg Mason’s Mary Chris Gay believes US large caps will be the best performers this year after being undervalued by sceptical markets.
Gay, who manages almost $10bn for Legg Mason Capital Management’s Value strategy alongside renowned industry veteran Bill Miller, says 2010 will see a continuation of rising corporate profits, with about 70% of companies in the fourth quarter beating expectations.
The manager believes continued scepticism in the market is making investors hesitant to put their money to work, which in turn is creating exceptional opportunities for large cap US stocks.
“We continue to believe in the longer-term secular story that higher growth will be found in the developed world compared to the developing world,” Gay says.
“It is very important to understand what is driving the fundamentals in China and other emerging markets, but from an investment standpoint, the question for us is how do we price that in to companies that we follow?
“From an investment standpoint, businesses like General Electric, Cisco, IBM, Microsoft, Amazon, and AES, are benefiting from growth in the developing world, and of course in China, even if it is more subdued.”
Technology was among the strongest performing sectors in the US in 2009, rising over 60%, and continues to be the fund’s largest sector weighting, says Gay. She has gradually reduced almost every holding in the sector other than Microsoft, which doubled in size over the course of 2009.
We believe technology remains among the most attractive sectors in the market, but we are selectively stockpicking in the area,” Gay says. “Just as in the wider market in this environment, we think stock selection is, and will continue to be, much more important, especially so in this sector.”
Gay also favours larger pharmaceuticals, biotechs and financials such as Merck, Amgen and Genzyme, while the fund continues to hold a large overweight position in financials.
“Looking at valuations, we view them in the financial sector as being among the cheapest that we have seen, very similar to the environment coming out of the savings & loan crisis in the early 1990s,” says Gay.
“On a price-to-book basis and normalised price-to-earnings basis we think larger cap banks are among the best value in the sector.”
