GLOBAL equities investors are navigating a range of factors right now including rising inflation and interest rates, the continuing Ukraine conflict, Chinese Covid lockdowns and slowing global growth.
How should global equities investors approach this volatile market? Which sectors should they consider?
Chris Lees, co-manager of Pendal Global Select Fund, points investors towards industries such as healthcare and semicondictors.
“According to our process, healthcare is the best defensive growth sector, semiconductors are the best cyclical growth industry, and the commodity-exporting countries are attractive because they have both defensive and cyclical growth characteristics,” says Lees.
“Our top-down monthly sector/regional scorecard has seen Europe, Japan and the consumer discretionary sector all deteriorate, with the more defensive healthcare sector improving.
“We have been buying some new stocks in the healthcare sector and think it could be one of the leading sectors for the next several years.”
But Lees warns of “demand destruction” in commodities as central bankers around the world continue to put interest rates up to slow down demand to reduce inflationary pressures.
He says it’s a good time to sell both “growth traps” — speculative, unprofitable, concept stocks, and “value traps” — cyclicals with leveraged balance sheets.
“Look to buy the dip in steady growth ‘compounders’ once the worst of the interest rate rises are over,” Lees says.
“As Warren Buffet wrote in his 1989 letter to shareholders, ‘it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.”
Lees also believes this commodity cycle will be different from the last one.
The 2002-2008 commodity cycle was driven by the positive demand shock from China joining the World Trade Organisation.
The current commodity cycle is driven by the negative supply shock from Russia invading Ukraine.
“If policy makers recognise and react to this new radically different regime and realise that putting up interest rates does not cure a supply-side problem, then this will probably turn out to be a mid-cycle correction,” he says.
“If not, and policy makers keep raising rates while yield curves flatten then invert, credit spreads widen, and we go into a global recession … many low-quality stocks with stretched balance sheets will have a very long way to fall.
“In that case we would move the portfolio up the quality curve and focus on those companies with rock-solid balance sheets that can weather the difficult combination of rising interest rates, rising input costs, and slowing economic growth. “
Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.
Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.
Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*
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