Finding value in a volatile market

4 minutes  

Take outs

  • Good stock opportunities exist despite global economic uncertainties
  • Everyone wants to be part of the tech hype
  • China-exposed companies should be kept on the radar

 

The recent downturn and pick up in volatility on global equity markets has birthed an unpredictable environment for investors.

In an effort to put the current environment into context, Garry Laurence, a long-term analyst at Perpetual Investments and now the Global Equities Portfolio Manager for the Global Share Fund, discussed the impact of recent volatility during Netwealth’s webinar, Investing in today's low interest rate climate.

Following a steep stock sell-off in the last quarter of 2018, sparked by the US-China trade war and the Fed, investors were overcome by fear of the possible implications on the global economy.

“Although the March quarter saw a significant rebound and growth steadied across the globe, economic trends are being kept on close watch by stock market investors,” Garry says.

He explains that while it’s been a tough period for value investing and a lot of value stocks have actually de-rated, there are still some very good stock opportunities.

“Because you’ve seen a flattening of the yield curve and low interest rates for such a long period of time, what’s happened is you’ve seen the growth stocks outperforming and, actually, you see an increase in multiples and what people will pay for growing stocks,” says Garry.


Healthy sectors

He notes that certain sectors are outperforming others, and one of his favourites is the consumer sector, which is seeing companies like Disney and Whirlpool exhibit very healthy and discounted stocks.

“Whirlpool has really high-quality brands and market shares, including a 30 per cent market share in US white goods,” says Garry, adding that its value is expounded by its strong international presence.

Other market movers include:

  • Structural growers or online advertising and transactional businesses
  • Defensive stocks such as Nomad Foods, Mondelez, and other snack food businesses
  • Software businesses and companies such as Oracle and Synopsis
  • Industrial automation giants, led by Siemens.

“Companies that have very strong balance sheets have sticky customer bases, and recurring earnings in terms of subscription fees. When you buy into leaders in those sorts of sectors, they do tend to grow quite nicely over a long period of time,” Garry explains.

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Tech hype

Given the rapid technological progress, the tech sector is “all the hype today”, Garry says. 

Everyone wants a piece of technology, but in Australia this can be a multifaceted undertaking.

“Australians don’t really have a very big technology sector, so the companies that we do have are bid up to extreme levels,” says Garry.

“Whenever I talk to someone in their 20s, they’re all investing in Afterpay or Zip. But when you ask them how much money they actually generate in terms of profits, nobody really knows.”

Looking around the world, he says that there are some high-quality businesses that still trade at very attractive valuations. These include eBay, Alibaba, Nintendo, Synopsis and Euronet.

“Euronet’s stock has actually re-rated significantly over the past year. It’s gone from 14 times to 20 times, but the business is growing its earnings at double digits.”

“We think the management is really high quality and will continue to grow. Besides this, Euronet is still a very cheap company when you compare it to, say, PayPal or some of the Australian fintechs,” Garry judges.

 

Strong stock countries

Garry admits that Perpetual has predominantly invested in China-exposed companies. This means that companies are not necessarily listed in China, but that all of their earnings are being derived out of China.

“We just think that the Asian region and specifically China are seeing this shift towards increased consumption. The government has, over the past decade or two, focused on increasing wages, and the flow-on effect of that is increased consumption,” says Garry.

“We think that if you own high quality brands, those brands will grow in terms of increased volumes into the population, but also increased pricing power and higher margins.”

He advises investors to pay attention to the Chinese services sector, which is set to flourish as the government steers the economy away from manufacturing and exports, towards consumer related services.


Find out more

Listen to the Netwealth webinar, Investing in today's low interest rate climate, for more expert insights into making a healthy investment despite an unsteady environment.

 

Learn more about value investing from Garry Laurence

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The information in this article is general in nature. Any financial advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. The article content is not intended to be a substitute for professional advice, so before you act on it you should determine its appropriateness having regard to your particular objectives, financial situation and needs, and seek any professional advice you require. 
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