While investors continue to brace for a highly anticipated recession, there are better strategies than simply hoping central banks cut rates.
Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland, said strong stock performance this year suggests markets are betting that central banks are winning the fight against inflation and not factoring in all the risks.
“It does feel to some extent as if everybody is hoping that we somehow get away with this one and that corporate earnings will be not as bad as we might expect,” he said.
However, he said the full extent of a softening macroeconomic environment and the impact it will have on companies has yet to be realized.
Any businesses with balance sheets that weren’t well capitalized or with question marks around their business model as they entered 2022 — the end of a “benign” period of loose monetary policy and strong growth — is going to find the current environment more difficult, MacLean said.
But there are opportunities for investors who remain disciplined in their approach and think about longer-term trends and opportunities.
MacLean said his approach is to look for companies in sectors exposed to long-term structural tailwinds, rather than companies “fight[ing] against the tide” and hoping current economic conditions last a bit longer.
These sectors include technology and health care, where trends powering businesses are in some cases decades long and should see growth despite the underlying economy.
With the cost of labour remaining high, MacLean said the “overreliance on human labour will be a risk to companies,” so automation is another sector with strong long-term prospects.
Technology companies, such as Microsoft and Alphabet, are attractive as they have been driving innovation for a number of years, he said. In terms of health care, Switzerland-based Lonza AG also presents an interesting opportunity, he said, as it helps drug manufacturers produce their products more efficiently. This means investors can avoid taking bets on a specific drug.
In the industrial space, companies like SMC Corporation and Keyence in Japan offer opportunities following China’s reopening and shift to a more value-add economy that’s less reliant on manufacturing, he said.
Lastly, luxury brands such as Hermès and Louis Vuitton remain attractive due to “differentiated consumption,” MacLean said. Even with the softening macroeconomic environment, these companies are still in demand thanks to their affluent consumer base.
“Despite the clouds on the horizon from a macro standpoint, there are a lot of really attractive long-term structural areas of opportunity, which is great news for a long-term investor,” MacLean said.
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