What sectors and markets enable investors to build strong equity portfolios in a post-Covid world shaped by rising interest rates, inflation and volatility?
David: In the short term, some sectors and markets would be better cushioned and function as hedges against inflation in this environment. Some examples include the materials and energy sectors as well as markets with high exposure to energy and materials in an environment of rising commodity prices. Consumer staples could be considered more of a defensive play, being less sensitive to economic cycles and more resilient to market downturns. While rising rates boost net interest margins, especially for banks in developed markets, they could also dampen loan growth. However, as bottom-up investors, we prioritize fundamentals, with stagflation looming. Stable cash flow and strong balance sheets are essential. Stocks with high dividends and stable cash flow generation would generally be more resilient during periods of high inflation and slowing economic growth. Companies with higher pricing power, such as the ones we hold, should perform better as they are likely to be able to pass on rising raw material costs to consumers and protect margins. It also reinforces the importance of innovation, a premiumization strategy, brand equity and channel control.
Andrew: One of the most interesting developments is the growing awareness of the influence of key structural forces reshaping our world on investment decisions. Many of these are systemic issues, such as climate change and rapidly changing social norms, and these can provide better and more enduring insights than traditional top-down approaches that focus on classic macroeconomic forces. . The complexity of climate change, for example, manifests itself not only in opportunities in the energy transition, but also in increased concerns about water and food security. We increasingly find that a theme provides an effective lens to identify emerging growth opportunities.
What changes have you made to your equity allocations since the start of this year, and why?
David: We manage our portfolios with an emphasis on quality. This year, we have taken the opportunity presented by volatility to refocus attention on stocks that we believe have the potential to be structural winners over the long term, particularly where stock prices have been more volatile. than the fundamentals suggest. We have increased positions where the occasion allowed. For example, with the Asian Sustainable Development Equity strategy, we have generally reduced our exposure to longer-dated growth companies. Geographically, we have reduced our exposure to China a bit, notably by reducing some of the longer-term growth stocks mentioned above, but we have added to India, notably by initiating a position in a medical diagnostics company and a life insurance company.
Andrew: The war in Ukraine has accelerated existing economic challenges, particularly rising inflation. Supply chain issues have become more prevalent over the past decade and have once again come to light through conflict. With input costs rising rapidly, we have placed greater emphasis on pricing power and resilient revenue streams, as well as security valuation; we avoided high value speculative companies with little or no revenue. While the market has focused on direct plays on rising commodity prices, we are looking for companies that will provide the efficiencies to offset these challenges.
In which of emerging themes such as decarbonization, new demographics, digitalization – and more – do you see the greatest investment opportunities?
David: We see opportunities in all of these themes – Asia represents an attractive opportunity to invest in companies exposed to secular growth diversifications such as decarbonisation, but which also have a positive impact on the region. Decarbonization in particular presents many exciting opportunities and as active managers we have spent a lot of time understanding and evaluating the value chain and associated technology.
We have invested in renewable energy component manufacturers, solar farm operators, essential transmission companies to evacuate renewable electricity, grid upgrade companies and energy storage system companies ( ESS) that help store the renewable energy generated during the day. We have also invested in an electric vehicle manufacturer and in the electric vehicle value chain. There is a very wide range of opportunities for investors in this region, with many of the companies we own among the world leaders.
Andrew: We are at a critical moment for decarbonisation: the conflict in Ukraine is likely to force a reassessment of energy policy by governments around the world. The rational response is to increase their investments in renewable energy to reduce their dependence on volatile oil and gas prices, as well as potentially unstable regimes. However, there is a risk that fossil fuel extraction will increase in the short term in the mistaken belief that it will provide better energy security. We believe that this risks increasing the number of locked-up assets and continuing the short-term trend in energy prices is risky. The supply of energy solutions is a major structural trend and the valuation of securities delivering these solutions has now become more attractive.
The Spotlight On: Equities will run from April 25-27 and culminate in a LIVE event (27th) where we will bring together a panel of fund pickers and fund managers to discuss their views and participate in an interactive session of questions and answers.
Read more about our Spotlight On: Equities here: https://fundselectorasia.com/spotlight-on/equities