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Quick, actionable insights for investors
Which companies will benefit from AI technology in the long term? Which are just caught up in a short-term frenzy?
It’s about more than investing in companies providing computing power or AI services, says Sue Scott, an analyst with Pendal’s Concentrated Global Share Fund.
“When we talk to companies, we’re looking for signs that the board and management are examining how the technology can improve their products and services and increase productivity.
“Does the board have technical expertise? Are management introducing pilot programs? Are they thinking about the ways they can harness AI to improve productivity?
“We also want to know a company has a strong governance framework around what they’re doing with regard to AI.”
“They’re the sorts of things were asking any of the companies we invest in.”
Impact investing works in three ways to provide diversification to traditional equities portfolios, says Tim Crockford, who heads up Regnan’s impact investing team:
Impact investing funds such as Regnan Global Equity Impact Solutions Fund focus on identifying the listed companies best placed to solve the world’s biggest problems.
Right now stocks equities in the $1 billion to $10 billion range are trading relatively cheaper than their larger counterparts – an inversion of normal patterns driven by appetite for US mega-cap tech stocks, says Tim.
“You’d normally expect to pay a premium for small companies because they tend to have higher growth rates,” says Crockford. “But something has changed across 2022 and many smaller caps are now trading at a lower PE multiple than large caps.
After the recent Optus and Medibank data breaches, stockmarket investors may be wondering how to assess a company’s ability to withstand a hack attack.
“Understanding the risk, and what management is doing to mitigate the risk, is critical,” says senior global equities analyst Sue Scott.
Sue gives the example of Spanish financial services giant CAIXA, which is held in Pendal Concentrated Global Share Fund.
“They receive 74 attacks every hour,” says Sue. Yet CAIXA hasn’t experienced a successful critical attack, she says.
Before investing, Pendal scrutinised CAIXA’s preparedness for cyber-attacks and mitigation efforts. “Importantly we saw very clear roles and responsibilities.
“It had a corporate-wide cyber policy, a specialised cyber security committee, an audit team, three board members with specific technical expertise and relevant management KPIs.”
It’s back to the future for investors with 2023 looking like a “normal financial crisis”, says Chris Lees, co-manager of Pendal’s Global Select Fund.
“The classic 60/40 asset allocation model is working again,” Chris says in his latest quarterly update.
“The investment environment is clearly changing from last year’s inflation and interest rate shock, to this year’s banking shock,” he says.
Financials and energy have deteriorated, while technology and consumer staples have improved, he says.
“At the regional level, we’ve seen the UK, Europe and Japan improve at the margin, and specifically the exporters in those markets,” Lees says.
“And that’s the type of stock that we’ll be looking to add to the portfolio next – some world-class champions in the UK, Europe and Japanese technology and consumer staples sectors.”
Regnan’s Tim Crockford spends most of his time searching for smaller companies with an innovative edge in solving the world’s biggest problems.
So where should investors be looking for innovative companies right now?
Probably not among Wall Street’s big tech stocks, which Tim still sees as relatively over-valued.
“I still think they are at levels that aren’t reflecting the post-Covid norm,” says Tim, who leads Regnan’s four-person Global Equities Impact Solutions team.
In contrast, European markets offer better value, he says.
“European equities are almost the mirror image of US equities. You had a lot of bearishness priced in last year because of the conflict in Eastern Europe.
“But the market went too far, particularly in terms of profitability.
“What we are seeing coming through in the first earnings season is that more companies are surprising positively. And this isn’t just in sales, but particularly on the margin line.”
We can debate whether the era of easy money is over.
But there is less doubt that the era of large-cap, beta-driven, passive investing is over, says Regnan’s head of impact investing Tim Crockford.
Investors should now be considering small-and-medium companies where valuations are more appealing than large caps, says Tim, who manages Regnan Global Equity Impact Solutions fund.
“Over the long-term, small caps have been a powerful driver of returns because they typically grow their earnings much faster than large caps,” he says.
Tim’s team looks for innovation in the small and mid-cap space – particularly those with potential to address pressing environmental and social challenges.
“While valuations have come down, for the right companies fundamentals remain intact.
“Long-term growth expectations for some companies exposed to these transformational themes are too conservative.”
Most global equity markets are in a drawn-out, bottoming process, says Pendal’s Chris Lees, who manages Pendal Global Select Fund.
But several segments are showing improving relative fundamentals, share prices and attractive valuations, he says. These include:
“Given the recent rally and 2023 recession risks we will wait to buy the dips throughout the year,” he says.
Lees remains 50% bullish and 50% bearish on equity markets.
“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or a larger event such as a contagion.
“Medium-term reasons to be bullish include the Fed regaining credibility with inflation and interest rates stabilising this year.”
Internet search has been upended by ChatGPT – a website that can scan existing knowledge and create new and original data such as images, text or music.
Will “generative AI” programs such as ChatGPT bring sweeping change to investing and financial advice? Or is it just the next dot com bubble?
Certainly we’ve seen AI announcements drive recent volatility in big tech stocks such as Microsoft, Google and Baidu, says Pendal’s head of global equities Ashley Pittard in our latest Fast Podcast.
But longer term, the AI technology behind ChatGPT – “the real gem” says Ash – will create significant revenue opportunities, he says.
“That AI technology is going to be the backbone of the internet going forward and it’s going to drive many, many outcomes – not just in search.”
The macro-economy – inflation, growth, employment – drives top-line sentiment among investors, observes our head of global equities Ashley Pittard.
But earnings in sectors and companies drive the valuation of specific stocks, he says.
Take Facebook owner Meta, which gained 25 per cent last week after a better-than-expected result. Then the stock fell back sharply, albeit briefly, when strong US labour force hinted at further rate rises.
Overall, the latest quarterly US reporting season is looking better than expected at the halfway point, says Ashley.
Earnings growth is down about 3 per cent “which is marginally better than what was forecast”.
Ash believes it’s time to “take a little bit of money off the table” when it comes to energy stocks.
What are the likely bull and bear scenarios for global equities investors?
Chris Lees, who co-manages Pendal Global Select Fund, breaks down the probabilities as follows:
It’s worth looking for opportunities to arise from the eventual turn in the US dollar, which is “inevitable but not necessarily imminent”.
We’re in an “average recessionary market”, says Pendal’s Chris Lees in our latest fast podcast.
“If you don’t think there’s a banking crisis coming, then it’s actually time to gently start buying again, and that’s what we’re doing,” says Chris, who co-manages Pendal Global Select Fund.
“We’re not going into, we think, a global banking crisis market. So there are opportunities.”
“In the post-Covid, post-recessionary world, as we look forward, healthcare looks really very, very attractive.
“We’ve got some fantastic growth stocks in the biotechnology tools, the biotechnology equipment, the biotechnology outsourcing world.
“Those are fabulous businesses whose earnings have got nothing to do with oil, interest rates or the current problems in the world.”
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