The Point

Global equities: how to find good stocks in volatile times

It sounds a no-brainer, but the first tip for equity investors right now is “buy good companies”, says Pendal’s Paul Wild.

“It’s an obvious thing to say until you try and work out what a good company is,” says Paul, who heads up European equities at our UK-based asset manager J O Hambro.

“A good company needs a moat around it – a moat that provides it with a defensible market share and pricing power.

“That’s most clearly illustrated in financial metrics by the return a company makes on equity, or on capital employed over a reasonable period of time.

“When you’re investing for the medium term, remember that the medium term is an aggregation of many short terms.

“And in the short term, prices can be distorted from fundamentals, affected by the positioning of funds.

“So, it’s a good idea to drip feed or average into the market, knowing that you’re very unlikely to ever pick the absolute low.”

What Aussie investors can learn from drama in European markets

Dramatic changes in European equity markets over the past six weeks — and energy prices over a longer time frame — provide poignant lessons for investors everywhere.

“It shows that investors, no matter where they are, always need to think about pricing power and relative resilience,” says Paul Wild, who runs a European equities fund at Pendal’s UK-based asset manager J O Hambro.

“The opportunity set for investors can change very quickly. In Europe it has shifted hugely since the beginning of the year and investors need to alter their stance,” Paul says.

“People in different parts of the earnings spectrum react differently. Household fuel bills will be more impactful on low-income households.”

Paul expects luxury demand to hold up better than other retail categories. “We’ve seen prices rising for jewellery and watches at the very high end.”

Healthcare is also less affected, demonstrated by the share prices of big drug companies. “Utilities as well because of the expansion of renewable assets, notwithstanding those more exposed to Russian gas exports.”

Investing in Asia: The case for Thailand

Stocks in Thailand have disappointed lately for a variety of reasons.

Known as an export base for autos – especially trucks – Thailand has suffered from the advent of electric vehicles.

Tourism – including medical tourism – was upended by Covid and still hasn’t fully recovered. Meanwhile, political uncertainty hasn’t helped.

“Demographically challenged with a comparatively smaller workforce and an ageing population, Thailand faces severe competition from other ASEAN countries such as Vietnam and Indonesia,” says Pendal’s Asian shares PM Samir Mehta.

Samir doesn’t own Thai stocks right now. But cheap valuations prompted him to fly in recently to meet with Thai companies on his watch list.

Thiland is largely a case of “watch and wait” right now, says Samir.

In a new article, he offers a quick overview of the case for investment in Thailand.

How to assess company management: four tales from Asia

For all the focus on macro-economics, the actions of management are a major factor in a company’s success.

There’s a reason why active investment managers spend so much time meeting with company execs.

Understanding a company’s leadership – and how well they are executing an appropriate strategy – is critical to successful long-term investing, says Samir Mehta, a senior Pendal PM who focuses on Asian equities.

When facing similar challenges, company managers often take different approaches – with very different results.

Samir points to Chinese restaurant chain Haidilao and camera lens maker Sunny Opticals. When both faced challenges, Haidilao successfully bunkered down and cut costs, while Sunny persisted in an expensive search for growth.

India’s Asian Paints leveraged an iconic brand, healthy cash flows and strong balance to fend off a potentially irrational new rival, while ASEAN-focused fintech SEA was drawn into a costly fight for market share.

Global equities: The more AI grows, the smaller the market could be

Not surprisingly, artificial intelligence was one of the big themes in the latest US quarterly reporting.

In Asia there’s a similar level of market excitement, with Taiwanese chipmaker TSMC up 20 per cent this year for example.

But it’s divorced from reality, reckons Pendal Asian Shares PM Samir Mehta.

At TSMC, AI accounts for just 6 per cent of revenue, with the balance of sales coming from stagnant laptop and phone markets, he says.

And the technology’s very success could curtail demand, he cautions.

Enthusiastic long-term AI industry revenue forecasts are often based on growing uptake of per-user licences.

But if AI succeeds in its promise of making business more productive, companies will reduce staffing.

“The effect of raising productivity is going to mean fewer people will need that software because fewer people are employed,” Samir says.

There’s opportunity in China stocks if you know where to look

China’s uncertain economic outlook presents an opportunity for discerning equities investors, argues Pendal’s Asian Share Fund manager, Samir Mehta.

“The Chinese stock markets were doing quite well until about January-February but have now handed back almost all of their returns this year,” says Samir.

“Over the next few years, maybe even a decade or more, we should expect China’s GDP growth to be significantly lower than in the past.

Still, Samir believes it’s a good time to look for Chinese companies with robust market positions and strong cash flows.

“Companies in sectors with concentrated market share positions, or where they possess pricing power and – better still – where there is a focus on cutting costs and generating cash flows without affecting growth.”

Samir names Tencent Music (the Spotify of China) and gaming giant Netease as standouts among others.