When looking for companies to invest in, think medium-term, buy sustainable themes, look for opportunities, and drip-feed or average the market, says a new report.
Paul Wild is Principal Fund Manager at JO Hambro Capital Management, a wholly owned subsidiary of Pendal Group.
In a recent report published by the investment manager, he said that when it comes to global equities, invest in “good companies” that have a gap around the perimeter.
In other words, invest in companies that have “defensible market share and pricing power”.
Equity headwinds are often an infrastructure tailwind
“When investing in the medium term, remember that the medium term is an aggregation of many short term terms. And in the short term, prices can be distorted from fundamentals, affected by fund positioning,” said Wild.
“So it’s a good idea to drip feed or average the market, knowing that you’re very unlikely to ever pick the all-time low.”
He added that managers have to fight the behavioral instinct to become more bearish as the market goes down.
He said: “The impact of inflation and interest rate increases on consumption, investment and credit risk are key considerations for investors.”
Wild suggested focusing equity investments on companies that have pricing power and can sustain yield.
“Healthcare and pharmaceuticals stocks have been ‘a port in the storm, financials have been a bit more mixed and their outlook remains that way,'” he said.
“While rising interest rates are helping many lenders improve their net interest margins, fears of an increase in non-performing loans as rates rise have partially offset the good news.
“Our view on banks is that the need to provision bad debts will increase, but it is at very low levels so we will see some normalization.”
“Insurance companies look relatively attractive, he added, and some tech stocks present an opportunity – but they need to have strong balance sheets and be profitable.”
Wild explained that companies that facilitate the digitization process for businesses are examples of strong technology opportunities.
“And there are also opportunities in the semiconductor sector – although Wild prefers companies that benefit from lithography capital investment by semiconductor companies, rather than the companies themselves,” said he declared.
He said to look for sustainable themes and trends “that are irrefutable”, saying: “The whole field of energy efficiency is one and there are myriad ways to play this. It could be via renewable energy and investing in semiconductor capex games, or it could be in the industrial sector.
Wild added that digitization is another irrefutable trend.
“It is clearly time to avoid companies that are excessively speculative, or have weak balance sheets, or will have difficulty accessing finance at reasonable rates,” he said.
“Investors need to look through the crisis or dislocation as best they can and know there is always the other side, patience tends to be rewarded.”