In a recent update, Bell Asset Management Chief Investment Officer, Ned Bell discussed key themes, challenges and opportunities in global equities for investors. Highlights from the webinar include:
Expectations of higher inflation and interest rates will drive the world’s equity markets in 2022 and favour smaller, quality companies with the ability to raise prices without affecting demand – this was the key theme covered in the webinar held on 22 February 2022.
Ned Bell, Chief Investment Officer said the stock market was currently transitioning from a focus on big growth stocks, like technology companies, to smaller firms in sectors like health care and consumer goods.
“There is definitely a change happening. Clearly, we’ve seen a lot of valuation risk materialise at the top end of the market, however we’re seeing good valuations in the small to mid-cap (SMID) area.”
SMID capitalisation companies currently have a price/earnings ratio of 16.8 times, which is a 40% discount to large cap company growth. The earnings recovery still has a long way to play out in the SMID arena, with SMID EPS growth in 2022 estimated to be 21% compared to 12% for MSCI World Stock index. SMID equities could arguably appreciate by 33% over the next 12 months.
We really do believe this is the environment where high quality companies with pricing power are going to do really well. With inflation spiking and interest rates rising, that could set back companies that don’t have pricing power.
When looking out to the second half of 2022, Ned expected inflation rate growth would begin to ease, reducing pressure on the central banks to raise interest rates and allowing developed economies to gain economic momentum.
“We believe ‘quality’ will shine in an environment where inflation is rising, interest rates tick higher, stimulus dissipates, and global economic growth decelerates.”
With the volatility which had hit markets at the start of 2022 had also meant that, for the first time in two to three years, the investment team had been able to rebuild holdings in companies it had always liked but had to sell because they had become overvalued. As a result, the investment team had re-established positions in Japanese high-tech and medical products company Hoya, global medical technology company Masimo and coffee chain Starbucks.
“We’ve sold all of these companies sometime in the last two or three years for valuation reasons. And had bought back into these companies because the share prices of the firms had fallen an average of 36% in the recent market sell-off.”
In terms of the regional allocations, the portfolio is now overweight Europe, although with no Russian or Ukrainian exposure, and had been cutting its position in North America.
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