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Peter Hardy, senior client portfolio manager of Global Value Strategies at American Century Investments. My team manages the Renaissance Equity Income Fund.
The questions regarding tariffs and their impacts to the businesses we’re following. To a large extent what we are doing as investors is looking through a business cycle and valuing companies on their normalized return potential. So not looking at them at the peak but understanding what they can return through a cycle and then applying appropriate valuation. We’re also looking at where things can go when the business is stressed: stress-testing that business model, seeing where returns can go and applying appropriate valuation to those downside returns.
The whole point being we’re doing our best to determine economic reality or the actual cash flow impacts to our businesses as opposed to reacting to market fervour or speculate on how something will potentially occur on stock prices, so we are looking at business fundamentals.
What we generally see is the concern about tariffs is creating another short-term source of potential volatility, and while the market had been sloughing that off or not acknowledging it in previous quarters, it came to bear in the fourth quarter.
The stock reactions of many of the companies we follow have largely been greater than what we believe the economic reality of the tariffs so many companies within the industrial sector, for instance, that have sold off due to tariff concerns, appear more attractive. And the reason is when we go company by company, the impacts are far less severe than the stock reactions due to the fact that long-term returns potential of these businesses hasn’t changed. And the reason we feel that way is companies can pass on increased input costs to their clients so their product prices will go up or they can eventually relocate facilities from, say China, back to a better locale like Canada.
And so while there are inflationary pressures and global growth concerns that are part of this tariff or trade war issue, the company-specific impacts are likely less muted due to the switching and the passing on of costs.