Investec's King and Saunders: Our seven key trades for 2012

Investec Asset Management's Max King and Philip Saunders have backed the winners of the 2011 to once again outperform this year amid ongoing volatility in global markets.

The duo, who run a number of multi-asset funds including the top performing Investec Balanced Managed and Managed Growth funds, have outperformed peers in the last three years. They returned 50.3% and 60.8% respectively against 32.8% for the IMA Balanced Managed sector and 37.7% for the IMA Active Managed sector (according to Morningstar).

Below they have identified seven investment themes for 2012, which suggest the overall winners this year could be similar to 2011.

Corporate debt
The duo expect reasonable returns from corporate debt, but urge investors to steer clear of developed market government bonds.
"Corporate spreads should fall in 2012 but government bond yields should rise," they said. "Therefore returns from medium and high yield bonds should be good but investors will need to keep duration short for higher quality bonds."

Emerging markets currencies and debt
Many currencies reached expensive levels in 2011, heralding a setback for local currency emerging markets debt, but the duo said that provided a ‘renewed investment opportunity', with better value now apparent in currencies.
"The outlook for debt is also improved by the peak in inflation and interest rates," they said.

Quality stocks will continue to out-perform
"Investors continue to be tempted to invest in 'value' or ‘recovery' stocks (such as banks)," they said.
"While there may be selective attractive opportunities in these areas, the best returns will be earned from high quality companies on only reasonable valuations, but with sustainable growth.
The managers are also favouring mid and small cap stocks over mega-caps. "The best stocks to buy may still be the ones you wished you had bought a year ago," they said.

Emerging market equities return to outperformance
2011 saw many emerging markets sell-off, particularly in the later half. After a disappointing year, the managers said valuations were attractive relative to developed markets.
"A peaking of inflation and interest rates should be positive for most economies and any setback to growth in China will only be temporary," they said.
"Fund outflows from emerging markets should turn into inflows as the outlook improves."

Resource equities
"The outlook for commodities may be subdued but we think the opportunities in equities are plentiful," they said.
"The growth in natural gas and shale oil production both in the US and globally is transforming the outlook for energy and offers particular investment opportunities. A slow-down in China threatens demand for certain commodities in the short term but structural change is supportive in the longer term."
They added while mining companies face the challenge of resource nationalism, the opportunity of bringing new production on stream remains.

Consumption
The duo expect consumer spending will remain strong in emerging markets, particularly in Asia, throughout 2012, with a focus on technology, consumer brands and luxury goods.
They also expect consumption in the US to continue to pick up, driven by low interest rates, falling inflation, improving housing conditions and stabilising economic outlook. Once again, brands with a global reach should continue to justify higher valuations.

Volatility
King (pictured) and Saunders expect volatility to be a permanent feature of markets as a result of enduring nervousness caused by two ‘massive' bear markets in the last decade.
"Investors need to either look through short term volatility in making long term investments or use it to their advantage by buying when volatility is high and reducing when investors are complacent," they said.
"We think it is better to be in markets and accept the volatility than miss out on long term opportunities. Market timing is not getting any easier and managers that depend on this for their returns are set for a lean period."