The Point

Global Equities: where to hunt as big tech stocks drop

Rates are rising and long-duration assets like big US tech stocks are underperforming.

Where should investors look?

“The world is normalising and people don’t need as many streaming services,” says Ashley Pittard, Pendal’s head of global equities.

“People aren’t buying as much stuff online. They’re going out again and eating a meal.

“That’s why in the current earnings season in the US we’ve seen Amazon and Netflix disappoint but Coca-Cola’s numbers were fantastic.

“Coca-Cola is in a duopoly market and it’s got pricing power. In an inflationary environment, that’s what you want.

“Covid brought forward demand for many tech products. There are supply chain problems and higher input prices.

“And rising interest rates hurt long-duration assets because the discount rate applying to future cash flows increases.”

Be wary of the FAANGs and look for companies that can move prices with inflation, says Ashley.

Emerging markets look well placed to weather hike cycle

As the US Fed lifts rates, conventional wisdom says EM economies must keep pace to avoid capital outflows, putting a dampener on their economies.

But this time might be different, says Pendal’s James Syme.

“Our view is that EMs have been hiking hard for some time now — and it actually looks like it’s the Fed that is significantly behind the curve.”

For example, Brazil’s central bank has raised policy interest rates nine times since the first post-pandemic hike in March 2021.

“The implication is that if the Fed has to do 400 basis points in hikes, that doesn’t mean Brazil is going to have to.” The story is similar in South Africa and Mexico, says James.

There’s still a question as to why the Fed is moving more slowly than emerging markets.

“Maybe the Fed is right — maybe there’s much more deflation coming than we can see in trailing data.

“But if that’s the case, we could be getting to the top of EM interest rate cycles. If that’s true, maybe we can start cutting rates again.”

ESG: How investors can judge a company’s climate change plan

“Investors need to have confidence that climate risks are being managed well by companies in their portfolios,” says Regnan’s head of research Alison George.

But how can you tell? It’s a complex question, but Alison offers a four-point checklist.

Is the plan credible? Does it comprehensively cover material issues? Is it clearly disclosed, with sources? Does it broadly consider the impact of the net zero transition?

Is it ambitious? You should see clear, comprehensive targets in the short, medium and long term on all material aspects of climate change, including value chain emissions and physical risks.

Is it real? Is it backed by enough resourcing and capability, appropriate organisational structure, cap-ex plans and effective board oversight? Has the plan informed strategy development and decision-making? Is there evidence of progress?

Are they acting against change? Is the company paying lip-service while lobbying against change?

A company that passes all four tests is likely to have a solid climate action plan.

Crispin Murray’s weekly ASX outlook

Aussie equity investors will have noticed a large sector divergence in the ASX300 this year. Our head of equities Crispin Murray rates the sectors from best-performed to worst:

Right now the issue weighing on markets is not so much the rate hikes — which have been well flagged — but widespread scepticism that central banks can tame inflation without causing recession, says Crispin.