What I recommend for your portfolio

Chief Investment Officer and founder of Aitken Investment Management
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Another beautiful cool, crisp, clear morning in London today as I walked to work, yet the wonderful autumn weather is in complete contrast to the market storm we continue to find ourselves in.

What I’m trying to do is see as many investors and credit industry experts as possible while in London and relay those views back to you. Australia is 10,000 miles and nine time zones away from these shambles, yet due to instant news and the interconnectivity of the global financial markets, we’re very much involved.

There should be no doubt that we’re in a nasty bear market in European equities and European sovereign debt. How long it lasts is now the big question, followed by: where can I be invested and make a real risk adjusted return?

As I’ve said before, right here, right now is about as difficult as equity market investing ever gets. This is harder than the GFC, no doubt about it.

An analysis of history reveals that the direction of equity markets is often illuminated by regular signposts. I expect there is a very good chance that last week’s shocking US non-farm payrolls report, which showed zero employment growth, could ultimately prove to be a signpost indicating another leg down for US equities. Time will tell.

Currently, the dominant argument for economists and strategists is focused on the possibility that the US economy is entering a recession. It’s worth noting that history shows that the current level of US treasury yields and weak employment growth has always led to a US recession.

Clearly, history is only a guide, and this time it might be different. However, if it looks like a duck, walks like a duck, and sounds like a duck, then it probably is a duck.

Regardless, with an unemployment rate of 9.1% and zero jobs growth, the US economy is basically in a recession, therefore, we believe any argument regarding the merits of the technicality of such an event is irrelevant.

We continue to believe that investors should position their portfolios for a period of slow growth and low real returns.

Importantly, we think the recent rise in the US-dollar index is another signpost for equity markets. Clearly, the US dollar has significantly underperformed over the last six months. But the US dollar is still the world’s reserve currency and primary safe-haven, and recently, the dollar index broke above an important resistance level at 76.5.

Make no mistake, this has important implications. A stronger US dollar represents a significant rise in global risk aversion. This is a very important development, which if sustained, could prove to be a new negative signpost for further weakness in industrial equity markets.

It appears that a new leg down for global equities will be driven by the EU sovereign debt crisis, which is clearly entering a new and dangerous stage. In contrast, positive data reveals the Chinese economy is on a more sustainable growth path.

The conclusion we come to is get your portfolio as far away from Europe as possible. Our strategy remains to emerge from this market dislocation with a heavily East-facing portfolio.

We believe the vast bulk of growth in the world for the next five years will be in Asia and India, with the Australian economy outperforming the OECD, yet with very mixed sectoral performances.

With bulk resources generating the greatest free cash in the market, BHP, RIO, FMG and even the cheap WPL are the first stocks to deploy capital as Europe implodes.

Hard assets will continue to outperform paper assets, particularly as growth themes narrow. I really think BHP and RIO have been overly punished for simply being dual listed in the UK, which reminds me they will rally hard when the dust settles and investors realise they have sold/shorted the wrong East facing stocks.

Sorry to continue to be the bearer of bad news, but where I am in Europe, there simply isn’t any good news. Get your capital to Asia as smartly as you can.

Here’s my weekly stock tips:

Cochlear (ASX:COH) – Buy

Recall? So what? Cochlear has reported that its CI512 implant has experienced a “recent increase in implant failures”, and in order to find out why, Cochlear has voluntarily issued a recall of unimplanted devices. The issue is not a safety one such as the bacterial meningitis scare of 2002, but simply an issue of devices failing, which does not harm the patient, but results in the implant having to be explanted and replaced. Unlike the record of competitor Advanced Bionics, Cochlear has had a very good record on device reliability. Consequently we regard this recall as a good buying opportunity. We have lowered our earnings forecasts by around 12% for fiscal 2012 and by 6% for 2013 and 2014. Our new target price is $70, down from $75.

Webjet (ASX:WEB) – Buy

We have re-examined the outlook for WEB’s core flights business, which accounts for 95% of group revenue, in light of the strong revenue growth evident in the second half of fiscal 2011. Our analysis suggests it is highly likely this positive momentum will continue into next year. Our core thesis for the flights business is that we can see no obvious headwinds that are likely to disrupt it from generating an annualised revenue growth rate of at least 15% over the short to medium-term. We expect the company to deliver earnings per share growth in excess of 20% over the next two years assisted by strong underlying growth and the impact of the share buy backs. Our share price target is $3.04.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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