The Point

How inflation can hide stockmarket opportunities

Inflationary periods can be a good time to identify mis-priced stocks if you know what to look for, says Pendal’s Clive Beagles.

Pay attention to the difference between real growth and nominal growth rates of a company, says Clive, a UK-based equity income manager.

Real growth measures are adjusted for inflation. Nominal growth doesn’t adjust for price changes.

“Inflation has meant real growth forecasts have come down somewhat. But companies operate in a nominal growth rate world, and they’re still going to be high.

“Right now in the UK nominal growth could be 10 per cent — and that hasn’t happened since the 1980s.

“It’s a very different environment and people haven’t been focusing on it. Earnings could prove to be much better than people think because they are in nominal terms.”

In all markets it’s important to look at individual companies and decipher the split of revenue growth between inflation and volume, says Clive.

“If you can understand the split, you can identify companies that can pass through price rises, and those that might end up with strong revenue growth but no volume growth.”

Long-term investment strategies remain sound in Europe

Despite recent volatility the fundamentals of investment in European equities haven’t changed much says Pendal Group’s Clive Beagles.

Clive Beagles has a message for investors in Europe: don’t panic.

The war in Ukraine is a human tragedy and has immediate implications for many commodities, says the senior fund manager from Pendal’s UK-based J O Hambro asset manager.

But considered long-term investment strategies remain sound.

It’s a particularly pertinent message given the rotation that had been going on since the middle of last year from large, tech-focused growth companies (often on Wall Street) to value stocks.

“For many years people wanted to invest in mega caps and growth stocks and not much else,” Beagles says. “And then late last year and into this year investors got the point of thinking about something else.”

Emerging markets: Is it time to buy Chinese stocks?

“It’s a question we’re getting asked by a lot of clients,” says Pendal Emerging Markets manager Paul Wimborne.

The MSCI China index has halved since its peak in February 2021. Falls of that magnitude in developed markets soon attract bargain hunters sowing the seeds of the next bull market. Does the same thesis hold for China?

“The answer to that question at the moment is no,” says Paul. “We think value in EM should be assessed very differently than the developed world.”

Companies such as Alibaba and China Mobile may look like they fit the value bill. But investors also need to be able to realise that value.

“In the developed world, you have three strong catalysts for the realisation of shareholder value: strong corporate governance, minority shareholder rights, and an entrenched culture of merger and acquisition activity.

“In the emerging world, we think these catalysts are often lacking.”

Emerging Markets: where to find growth in a volatile world

The sometimes-overlooked markets of Latin America are a bright spot in a world worried about inflation, interest rates and war, says Pendal’s James Syme.

“In the first four months of the year, when global EMs were down 12 per cent, Latin American stock markets rose 11 per cent,” James points out.

“And it’s more than just a market move — the underlying fundamentals are looking pretty good.”

Latin America often flies under the radar, partly because its commodity-exposed economies are subject to boom-and-bust cycles that can leave investors vulnerable to swift capital outflows.

But in the face of global uncertainty economies like Brazil and Mexico are doing well.

“We’ve seen GDP growth expectations revised upwards as economic data comes in relatively strongly,” says James, who co-manages Pendal Global Emerging Markets Opportunities fund.

“While valuation alone is not an investment case, most of MSCI LatAm looks pretty reasonably valued in a world where a lot of assets don’t.”

Emerging markets look well placed to weather hike cycle

As the US Fed lifts rates, conventional wisdom says EM economies must keep pace to avoid capital outflows, putting a dampener on their economies.

But this time might be different, says Pendal’s James Syme.

“Our view is that EMs have been hiking hard for some time now — and it actually looks like it’s the Fed that is significantly behind the curve.”

For example, Brazil’s central bank has raised policy interest rates nine times since the first post-pandemic hike in March 2021.

“The implication is that if the Fed has to do 400 basis points in hikes, that doesn’t mean Brazil is going to have to.” The story is similar in South Africa and Mexico, says James.

There’s still a question as to why the Fed is moving more slowly than emerging markets.

“Maybe the Fed is right — maybe there’s much more deflation coming than we can see in trailing data.

“But if that’s the case, we could be getting to the top of EM interest rate cycles. If that’s true, maybe we can start cutting rates again.”

How Emerging Markets investors should approach China now

China’s economy grew at a better-than-expected 4.8% annual rate in the first quarter, despite pandemic lockdowns and tighter regulation on property developers.

But Pendal’s James Syme says a more telling figure may be the recent Purchasing Managers Index — a monthly survey of business activity which shows activity falling to its lowest levels since the height of the pandemic.

“We can only focus on the data and the PMI is a powerful guide to how problematic things are in China,” says James, who co-manages Pendal Global Emerging Markets Opportunities Fund.

Market nerves about China’s outlook mean some of its highest-profile and fastest-growing companies are trading at lower prices than they have for years.

But “cheapness alone is not a driver”, says James. “You need signs of positive economic or political direction.”

Investors should wait to see Beijing’s policy response to the slowdown before their next move, says James.