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The ten themes that matter most as markets fall
Financial advisers face a number of risks during this period of heightened volatility where markets are transitioning to reflect a world of higher inflation and rising interest rates.
In these uncertain times, global asset manager Capital Group believes its important for advisers to step back and consider the long-term trends that are driving companies and markets. The team recently put together the ten most important themes for investors to consider in the year ahead.
- Pricing power
- Tech trifecta
- Dividend comeback
- Health care innovation
- Transportation transformation
- China challenges and opportunities
- Media disruption
- Future of financials
- ESG everywhere
- Flexible fixed income
Inflation, inflation, inflation. It’s the main thematic driving market at the moment and the biggest risk investors face this year. Portfolio Manager at Capital Group, Diana Wagner, says to look for companies with pricing power so that they can protect their profit margins by passing on costs to customers, without it eating into sales. A good example of this is consumer businesses with strong brand recognition such as beverage manufacturers Keurig Dr Pepper and Coca-Cola.
Equity portfolio manager, Mark Casey, says the semi-conductor industry is in the strongest position during rising inflation. The sector has been able to raise prices without impacting demand. And if you think about it, he’s right. Just about everything from mobile phones to electric vehicles has semi-conductors embedded in it.
While inflation is running hot, fixed income portfolio manager, Damien McCann says, when inflation is rising, it means there are solid investment opportunities in corporate bonds. He says, “The relative value between higher-income bond sectors such as investment-grade (rated BBB/Baa and above), high yield, emerging markets and securitised debt is always changing.” McCann says focusing on bonds that offer the most opportunities for income-seeking investors is key.
We then move on to companies that have been dividend ‘zeros’ that will transition to dividend ‘heroes’. Capital Group says the sweet spot is companies that deliver a yield closer to 3%. Why? Because companies in this bracket had stable balance sheets, had attractive dividend growth prospects with strong underlying earnings growth prospects. Caroline Randall, equity portfolio manager, says these companies “have demonstrated a commitment to raising their dividends over time. Increasing dividend payouts can be a signal of management’s confidence in future earnings growth.”
Rich Wolf, Equity portfolio manager at Capital Group, is positive on life-changing drug companies. As we saw with Covid-19 mRNA vaccines from Pfizer and Moderna. He says, “A massive wave of innovation from health technology companies has led to improved diagnostics – both in the lab and at home. Companies like Exact Sciences and Illumina have developed liquid biopsy blood tests and genomic technologies that enable early detection of cancer and help in the research of complex diseases.”
Another thematic at play, growing rapidly, is electric vehicles (EVs). Kaitlyn Murphy, analyst at Capital Group, says there’s a massive shift to EVs partly due to government incentives, tighter emissions standards for petrol-guzzling cars and the falling cost of renewable batteries. It makes EVs a lot more appealing and profitable. Tesla is the clear leader, having first-mover advantage. While those looking to enter the space will find it difficult to compete with the likes of Tesla, Murphy says, “Don’t count them out.” Companies like General Motors have pledged to go all-electric by 2035, and she is confident, they will be one of the future leaders.
Supply chain disruptions have somewhat hindered manufacturing in the EV market, but China is positioned to dominate this global manufacturing supply chain. Local Chinese manufacturers are already producing high value add parts at scale and with Government subsidies to help prop up the EV industry. China is already a leading force in solar panel manufacturing, car automation could be their next growth area. What was historically dominated by the Japanese and Europeans could shift to China.
And during this time, the media landscape has been through fundamental change. The pandemic gave rise to new forms of content sharing such as video games and the metaverse. Netflix is the clear leader in streaming video with Disney+ hot on its heels. In the gaming world, Chinese Tencent is ranked as the leader with Japanese Sony trailing behind.
On the topic of disruption, it brings us to the fintech sector. Emme Kozloff, equity investment analyst at the Capital Group, says the future of financials is with financial exchanges that focus on equity trading. She says the modernisation of fixed income trading, by far the largest asset class in the world, could see their trading volumes soar. “Only a third of NASDAQ’s revenue comes from trading with much of the rest coming from its data services segment. I don’t think the market fully appreciates how diversified many of these companies are,” says Kozloff. It pays to look closely at these companies.
And finally, underpinning all investments is ESG. It’s everywhere and is only going to become more important. A good example is air conditioning and heating efficiency. Rob Lovelace, equity portfolio manager says “Regulations that require the replacement of older systems with more energy-efficient products in Europe and elsewhere could underpin a long-term tailwind for HVAC companies like Daikin and Carrier.”
Today’s geopolitical events and heightened volatility do make financial advising a challenging role. However, as the team at Capital Group would put it, “history has shown that markets have powered through past periods of geopolitical market shocks. It’s important to remember that investors can still find opportunity in the midst of chaos – be it war, inflation, or recession. There are still many companies that are thriving and innovating, so that’s where we focus most of our time and energy.”
Their main message to advisers and investors is to stay committed to your long-term investment goals.
