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Global equities: who will thrive as rates rise

The investment metrics that worked in a low interest rate world are no longer the right markers for profitable investing. Pendal’s SAMIR MEHTA explains

HOW do you pick your way through tricky global markets?

As markets adapt to higher interest rates, companies with good margins, a high ratio of sales to assets and strong net profits are best placed to survive and thrive, says Pendal portfolio manager Samir Mehta.

The types of metrics that worked in low interest rate world — measuring total addressable market size; valuing stocks as a multiple of sales; and earnings measures that hide stock-based compensation expenses — are no longer the right markers for profitable investing, he says.

“This is a market with nowhere to hide — bonds, equities, private equity, crypto, whether growth or value,” says Mehta, who manages Pendal’s Asian Share Fund.

“The reasons are evident — the Fed is raising rates and they are going to start the process of quantitative tightening.”

Mehta says the effects of this will play out over the coming years. As interest rates rise, the US dollar strengthens, vulnerabilities in the financial system are exposed.

“The first fatalities are on display — cryptocurrencies, bonds of Chinese property companies and the Sri Lankan economy — but there will be more.

“If you look back in history — the savings and loan crisis, the tech bubble, the housing bubble — as we go through a tightening cycle something big could break.”

Opportunity for investors

The crisis will be challenging but he says the opportunity for investors is to look through the valley and identify the factors that will help companies survive the downturn and then grow as stability returns.

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“In the last decade or more of this loose monetary policy environment, every entrepreneur, venture capitalist and most fund managers became focused on the concept of total addressable market.

“How big can this business become? How scalable can it be? Can you become the next Facebook or Google?

“Now, in trying to address a very large market, what became secondary, almost inconsequential, was the question of whether it was a profitable venture.”

Mehta says this explains the rapid growth of a whole raft of popular but unprofitable global tech companies.

“These companies were selling a $1 for 50c.

“If I was to stand on a street corner and hand out a $1 in exchange for 50c my turnover will go through the roof.

“But now, in the current environment, several of these companies could go bankrupt. Which will inflict pain on consumers accustomed to subsidies.

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The reason is twofold.

“Not only is there little capital available for companies to give you those subsidies, but there are massive shortages in everything around us. Problems due to supply chain disruptions; even finding qualified labour has become very difficult.”

The job now for investors is to find those companies, which will survive the shake out and take advantage of the dislocation.

Mehta says investors should turn to time-honoured measures like margins (the ratio of earnings to sales), asset turn (sales to assets) and net profits (after all expenses).

“Let me put in an Australian context: it’s no longer ‘Tim TAM’ for Total Addressable Market.

“Now it’s ‘Tim MAN’ for Margins, Asset turn and Net profit.”


About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at June 1, 2022. PFSL is the responsible entity and issuer of units in the Pendal Asian Share Fund (Fund) ARSN: 087 593 468. 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 and Trust are 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 Trust 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 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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