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Global equities: The sectors to think about now

How should global equities investors approach this market? Which sectors should investors consider? Here’s a view from Pendal’s CHRIS LEES

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.”

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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’.”

The outlook for commodities

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.

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“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. “

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About Chris Lees and Nudgem Richyal

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.

About Pendal Global Select Fund

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.*

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at June 15, 2022. PFSL is the responsible entity and issuer of units in the Pendal Global Select Fund (Fund) ARSN: 651 789 678. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8:00am to 6:00pm (Sydney time) or visit our website www.pendalgroup.com * The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned ) referred to in this document is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at http://www.zenithpartners. com.au/RegulatoryGuidelines

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