Asian small caps – 2000 revisited?
Catherine Yeung, investment director, Fidelity Asian Values
When it comes to value and growth stocks, ‘value’ small-caps still look cheap relative to their ‘growth’ peers. In fact, what we are witnessing at the moment is somewhat similar to 2000, when smaller-cap growth stocks were trading at an all-time-high premium to smaller-cap value stocks – even though these growth stocks had not delivered better earnings from the two decades before. Importantly, since 2000, on an earnings-per-share basis, value small-cap Asian stocks have grown earnings faster than growth stocks.
Then there is China – if we see any mean reversion there, we should benefit from another driver of earnings revisions for our holdings as well.
China continues to offer an attractive risk-reward profile. Not only has the country’s reopening led to a recovery in Chinese earnings but, if we start to see a recovery in the property segment, that would be yet another boost for the earnings environment.
Energy security to remain key
Jon Forster, co-manager, Impax Environmental Markets
We expect energy security to remain a key priority for governments, corporates and households in 2023. While energy prices have materially corrected from their highs last August, policy focus has not wavered in the drive to reduce exposure to fossil fuels by increasing renewable energy penetration and incentivising investments in energy efficiency. These investments are still appealing to corporates and households looking to manage down their exposure to energy price volatility in
the future.
This energy security driver has recently been further strengthened by policy promoting domestic manufacturing in these industries. The ongoing crisis will accelerate the transition away from fossil fuels towards a cleaner, more energy efficient economy, creating a more favourable backdrop for companies in this space.
Fed is past ‘peak hawkishness’
Natalie Falkman, senior portfolio manager, RobecoSAM Circular Economy Equities
This year has so far brought better visibility compared with 2022, when macro clearly dominated micro. The improvement can be attributed to structural trends that have led to many attractive investment opportunities.
Furthermore, reshoring and sustainability-linked investments backed by governmental regulations and financial support are improving the growth profiles of exposed companies, making them less dependent on economic cycles.
In addition, with the Covid-19 pandemic in the rear-view mirror, we are experiencing normalised business conditions and enjoying a clearer outlook for both companies and investors.
Finally, since no market comment is complete without mentioning the Fed: despite all the uncertainty, we are past peak hawkishness, which has also improved forward visibility.
Long-term impact of deglobalisation
Christian Schneider, co-portfolio manager, Brunner Investment Trust
At the heart of the current market volatility is the debate as to whether our current inflationary predicament is structural or temporary. Without question, some factors will prove to have been necessarily short-lived. Having spiked to above $127 (£104) a barrel in March 2022, further cost rises are unlikely. Similarly, the supply chain issues that dogged economies reopening after the Covid-19 pandemic are now largely eased.
With increasingly tense relations between the US and China, however, there is the real possibility of a meaningful divergence between the world’s factory and its biggest consumer. Deglobalisation of this scale has the potential to make cost inflation a more permanent feature of the economic landscape.
Banking sector’s woes call for defensive stance
Meera Hearnden, investment director, Parmenion
Markets have been full of surprises in recent years – and 2023 is proving no different. Despite signs of optimism that inflation was rolling over and interest rates would peak, the banking sector has come under the spotlight, bringing back memories of the global financial crisis.
Our overall view is to maintain a defensive stance, which means we are overweight in fixed interest, particularly global government bonds and sterling corporate bonds. While yields remain attractive, they provide some ballast in a wider portfolio during choppy times. We will continue to focus on quality and balance sheet strength in our portfolios as a further cushion.
Private equity to weather tricky economic storm
Helen Steers, lead fund manager, Pantheon International
We expect the private equity sector to continue to be resilient despite the current economic environment. Historically, private equity has consistently outperformed public markets – and especially so during times of economic stress.
According to S&P Capital IQ, between 2002 and 2022, upper-quartile private equity managers outperformed the Dow Jones Industrial Average by 890 basis points in bull markets – widening to 1,940 basis points in bear markets.
This outperformance is due to the hands-on approach of private equity managers who use their financial, operational and sector expertise to help their portfolio companies weather more difficult economic times.
This article first appeared in the April edition of Portfolio Adviser Magazine
