Allianz GI’s UK equities fund manager on the merits of oil and why defensive stocks are losing their edge

In the first of Hot Commodity’s investor series, I chat to Simon Gergel, chief investment officer, UK equities at Allianz Global Investors, about which stocks are set to become a hot commodity next year and which ones will be yesterday’s news…

Simon says: oil majors

The fund manager is pretty bullish on large oil companies, which suggests that the sector is suitably distressed enough to become attractive. Simon thinks the oil giants are in a more promising shape than oil itself, as the depressed pricing environment has made the likes of BP and Shell cut costs and improve their business models. Although he is expecting the price of oil to rise in the medium term.

So will Allianz GI be ramping up its allocation to oil-focused equities? Simon did not rule this out. “We’ve already got quite a big position on oil companies and we have increased our position before,” he says.

Simon says: copper

Surprisingly commodities are not the pariah one might expect in the current pricing climate, dragged down by the growth slowdown in China. Or should I say SOME commodities. “It’s dangerous to generalise”, says Simon.

“A lot of production has been taken out of copper this year. It is much tougher to increase output for copper than for some other metals such as iron ore, as it uses deeper and more difficult technologies”, he says, the implication being that tightening supply will push up the price. “It is also less dependent on Chinese infrastructure. We’ve bought [FTSE 100-quoted Chilean copper miner] Antofagasta in the last six to nine months.”

Simon says: leisure

Other sectors on the Christmas wish-list are leisure stocks, such as gambling firms William Hill and Ladbrokes, cruise company Carnival, pub chain Greene King and satellite firm Inmarsat – “I see growth in marine and aviation communications”.

I asked Simon what he thought about fund guru Neil Woodford’s bullish stance on tobacco and healthcare.

“The problem with tobacco is that the valuations are so high now,” he says. “The product is on the decline in most parts of the world.”

Simon likes GlaxoSmithKline – “the Novartis deal transformed the business” – but that’s the only pharmaceuticals stock in his portfolio.

So what is leaving him cold?

“Defensive stocks/bond proxies have done well at a time of low rates,” he said. (Bond proxies are companies with healthy dividend yields and low volatility, that are seen as a safe-ish bet in poor market conditions).

But with rate rises imminent in the US and the UK, which will increase bond yields, Simon expects defensive stocks, including the likes of Unilever and Reckitt Benckiser, to become less attractive.

Simon expects an EU referendum in late spring/early summer. “Uncertainty around a Brexit could lead people to focus on global companies, which are less dependent on the UK economy,” he says.