DRAMATIC changes in European equity markets over the past six weeks — and particularly energy prices over a longer time frame — provide poignant lessons for investors everywhere.
“It shows that investors, no matter where they are, always need to think about pricing power and relative resiliency,” says Pendal senior fund manager Paul Wild, who runs the group’s European equities fund.
“The opportunity set for investors can change very quickly. In Europe it has shifted hugely since the beginning of the year and investors need to alter their stance accordingly,” he says.
“For example, we were confident for the prospects of our overweight positions in automobiles and financials, but we have had to alter our stance.
“Equity sell-offs are never disciplined affairs. Investors should now be focused on buying companies with strong franchises and strong relative pricing power against an inflationary backdrop,” Wild says.
The inflationary impact of higher energy prices affects consumers, Wild says. They’re re also hit by other issues such as higher raw materials prices and supply chain challenges. Corporates are facing similar challenges.
“Investors need to think through how shocks to the system, such as higher energy prices, flow through to the real economy. Almost no sector or company is unaffected by what’s going on in Ukraine,” Wild says.
“People in different parts of the earnings spectrum will react differently. Household fuel bills will clearly be more impactful on low-income households, than they will on higher income households.”
Wild expects luxury demand to hold up better than many other retail categories. “Many of the brands have very strong pricing power. We’ve already seen prices rising for jewellery and watches at the very high end.”
Healthcare is a sector that will be less affected, and that’s been demonstrated in the share price of large pharmaceutical companies.
“Utilities as well because of the expansion of renewable assets, notwithstanding some are more exposed to Russian gas exports.”
It’s important to look beyond the current crisis, no matter where an investor is placing funds, Wild says.
“While growth is Europe will be lower than January forecasts, the region’s baseline is extremely low interest rates.
“Investors need to keep in mind that Europe had some very significant post COVID tailwinds including a huge fiscal stimulus during the recovery plan. Unemployment is at all-time lows.
“The best opportunities are in companies with pricing power and reliability. If investors can find these and trade their way into them, they might just find themselves with a higher quality portfolio than where they started.”
Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.
Paul manages J O Hambro’s Continental European fund.
Pendal offers a range of global equities strategies to Australian investors including:
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at April 20, 2021. PFSL is the responsible entity and issuer of units in the Pendal Concentrated Global Share Fund (ARSN: 613 608 085) and Pendal Global Select Fund (ARSN: 651 789 678). A product disclosure statement (PDS) is available for each fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the funds 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 from 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com