The opening up of economies thanks to rising vaccinations is also bringing inflation with it. This will all have differing implications for global markets.
Hauke Ris, manager of the Robeco Sustainable Global Stars Equities fund, explains where he sees investment opportunities right now.
“Overall, we hold a positive outlook on equities but there are concerns about the relatively high valuation levels which to some extent put us on alert.”
He adds: “If we look at the monetary environment it starts to make some sense. There is so much monetary support, driving interest rates down which helps with the cost of capital for companies. We accept the situation, but it needs closely monitoring.”
Ris is not overly concerned (right now) with inflation pressures so long as it is somewhat contained. “I think equity markets will continue to do well if inflation and interest rates are a little higher but if it really starts to increase, that would be bad for equities.”
On a more positive note, he points to a solid earnings season and the fact that earnings revisions are still very strong.
The global portfolio that Ris manages is weighted heavily in the US – currently around 70%. He explains the rationale.
“We invest a lot in the US, there has been a lot of fiscal support and for now it is supporting corporate earnings, and this is where we are positioned for the short and medium term.”
Free cash flow
His preference is for companies that provide high return on investment capital and that generate good free cash flow. These companies are in certain sectors which are well represented in the US – notably IT.
“There is a good pool there to find the stars – and there are still areas where we find good valuations.”
One sector which attracts little interest for Ris right now is consumer staples. The portfolio is significantly underweight this sector compared to the benchmark. He explains his thinking: “We don’t mind paying up a bit for very solid companies, but we find that consumer staples is a relatively expensive sector.
“We really look at it with the idea that the stocks in our portfolio need to be stars- they need to have good potential to make a difference. And in combination with valuations – which we are very mindful of – for us, consumer staples is a sector we prefer to allocate less capital to.”
‘Value with a future’
Jaap van der Hart, manager of the Robeco Emerging Stars Equities fund, believes investors will start to look for stocks with the ability to deliver on their perceived value, showing better earnings potential in a normalisation of the macroeconomic backdrop.
Therefore, after the first wave of value investing boosted all cheap stocks, he expects the second wave to focus on what he calls “value with a future” – that is companies with inexpensive valuations that do not discount their sustained earnings growth ahead.
“Value is not just about earning multiples, it is about growth opportunities, capex needed and potential risk. Value without a future is not value. There is a distinction between value and cheapness,” van der Hart says.
Andy Merricks, fund manager at 8AM Global takes a similar line to Ris that inflation is something to watch rather than obsess about. He has a strong conviction that it is not returning with a vengeance and like van der Hart he advocates looking to the future rather than the past.
“If a fund holds predominantly basic materials and industrials, it will do very well if inflation is bid up; but our fund reflects our best guess, having weighed up the probabilities, that it is going to be more rewarding for investors to overweight the future and underweight the past.”
So what does this entail? Merricks explains: “It seems to us that markets are over-confident that everything is set to return to how it was before we’d ever heard of covid-19.”
He adds: ”We’ve already seen in the UK how a new variant can derail expectations. To invest too heavily in sectors that typify ‘the reflation trade’ seems to us to be rather risky.”
The view at 8AM Global is that healthcare will remain at the forefront of most countries’ priorities, so Merricks favours a healthcare innovation ETF.
“It’s not just humans that need looking after. There will most likely be a continuation of attacks on global computer systems, so we invest in ‘healthcare for robots’, or cybersecurity, as it is more widely known.”
Staying with the healthcare theme, it has been well flagged that there has been a surge in pet ownership since the first lockdown. Inevitably, these pets will succumb to ailments and so pet healthcare is a theme 8AM plays through the inclusion of Dechra pharmaceuticals – a global specialist veterinary name pharmaceuticals and related products business.