THE global economy has shown resilience in recent months — but there are now signs it is gradually slowing, along with consumption.
“It doesn’t feel like things are falling off a cliff,” says Pendal equities analyst Anthony Moran.
“But we are moving from single-digit growth to single-digit declines. In this environment investor mindsets change from being comfortable about resilient demand to thinking about downside risks.
“That’s making everyone a bit more wary and it’s a good time to think about your portfolio.”
The shift has been particularly prevalent in industrials, which have underperformed other sectors.
“Investors want a way to offset the risk, particularly because we’re talking about modest and moderate declines, not a full-scale recession.
“Investors don’t need to put all their money into hyper-defensives because things may not be that bad,” Moran says.
“They should be looking for companies that are going to grow above their category, or are able to grow market share, particularly if they are trading at attractive valuations.”
One example is Aristocrat Leisure (ASX: ALL), which Pendal owns in several equities funds.
“They are not only exposed to the traditionally resilient category of gaming. Because they’ve invested huge amounts in research and development, it’s allowed them to keep taking market share in slot machines, particularly in North America and in online casinos.
“Companies like Aristocrat should be able to still deliver pretty good earnings growth even if gaming spend declines because of market share gains,” Moran says.
Aristocrat has also recently won a licence to use NFL branding in the US on slot machines, which has the potential to be a long-lasting franchise and deliver a younger demographic into casinos.
Another company that falls into the ‘outperformance’ category is building materials supplier James Hardie (ASX: JHX), which Pendal also owns in several funds.
“They’ve had a double-digit decline in market demand in the US market, but they’ve been able to win market share through refocussing their attentions on the large home builders in the last 12 to 18 months.
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“Not only has James Hardie been winning market share in their customer segment, but those large home builders have been winning share themselves within the housing market … benefiting from a lack of existing home inventory.
Moran says companies like Aristocrat which make upfront investments can lose in the short term in the hope of longer-term gains.
“That’s as long as they have the people to execute. If they have that, then investing can be a good lead indicator of future performance.
“When you find stocks that invest in the future, grow above their category and are gaining market share, then they are generally going to surprise on the upside and that’s where you want to have your portfolio positioned.”
Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.
He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.
Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
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