Rob Almeida, the chief strategist at US mutual giant MFS, says investors have become soft – and things might be about to get very hard indeed.
Almeida, who helps oversee $US630 billion ($965 billion), argues a generation of low interest rates, fiscal stimulus and globalisation have left markets unprepared for a new reality.
Markets could be heading for a more difficult period of higher rates and lower growth. Picture: David Rowe
“In my view, the policy response to the global financial crisis and the pandemic purposely created a soft business operating environment that produced high returns for owners of capital,” he says.
“Life, business and investing aren’t easy. Yet investing was recently made easy by the overwhelming policy response.”
Local investors were reminded about just how hard life might be about to get on Wednesday, when hot inflation data all but killed off hopes of the Reserve Bank cutting rates this year.
But on Thursday night, data in the United States raised fears we could be entering a nightmare period of stagflation.
US GDP growth came in at 1.6 per cent, well below last quarter’s 3.6 per cent reading and consensus expectations for 2.5 per cent, while the core personal consumption expenditure deflator – a key inflation measure studied by the US Federal Reserve – rose to 3.7 per cent, 0.3 per cent higher than expected.
JPMorgan CEO Jamie Dimon warned at The Australian Financial Review’s Business Summit last month that stagflation was the worst-of-all worlds scenario investors had become complacent about. Not any more.
Almeida’s prescription for hard times is to get selective to find the stocks that can handle this environment. With this in mind, we’ve collected 12 stock tips from fund managers who presented on the recent roadshow conducted by Future Generation, which runs a pair of listed investment companies that donate 1 per cent of their assets to charity.
Jun Bei Liu, Tribeca Investment Partners
The Tribeca portfolio manager says Goodman Group should be “a core holding of any portfolio”. But the property giant’s new foray into data centres makes it even more attractive in a digital world. She says more than 4 gigawatts of data centre capacity has been contracted – larger than any other player in Australia.
Liu believes another investor darling has further to run. While medical imaging software provider Pro Medicus has been an impressive growth story over the past decade, she points out its market share in its main market of the US is still only 7 per cent, leaving plenty of room for growth. Further, it is expanding beyond radiology into other hospital departments, starting with cardiology. Artificial intelligence tools should also help win customers.
Ben Griffiths, Eley Griffiths
COVID lockdowns led to a surge in demand for self-storage that Ben Griffiths believes will continue, thanks to suburban population growth, a shift to apartment living, and the rise and rise of e-commerce. Abacus Storage King, which was recently spun out of Abacus Group, should also benefit from industry consolidation, as smaller players are gobbled up.
Griffiths also likes Alliance Aviation, which provides contract aviation services for Australian mining and energy companies, and some aircraft for Qantas and Virgin. While a big period of investment in new planes has pushed up debt levels and pushed down Alliance’s share price, Griffiths sees this as an opportunistic entry point to a company that “brings an entrepreneurial verve to a conservative sector”.
Nikki Thomas, Magellan Financial Group
Portfolio manager Nikki Thomas believes artificial intelligence can turbocharge two key trends under way at European enterprise software giant, SAP. First, a shift from on-premises to cloud-based systems is going well, with more than half of its total software revenue now coming from the cloud, but Thomas says AI should help drive further adoption of SAP products.
Second, while Thomas expects SAP’s existing plan to strip out legacy costs will help boost margins over time, AI should also make SAP’s operations more productive, creating a top- and bottom-line boost from the technological revolution.
Will Riggall, Clime Investment Management
Clime’s chief investment officer says engineering and construction giant Worley is one of the best ways to play the decarbonisation theme that will play out for decades, given the huge amounts of capital required to meet emission targets. But Riggall argues Worley, which has rallied strongly over the past three years, is set to enjoy a margin boost from cost-cutting and the complexity of energy transition projects.
David Prescott, Lanyon Asset Management
Lanyon’s founder sees three catalysts for Mineral Resources. First, the company’s new iron ore mine will come on stream in June and will ramp up to become a substantial cash cow for the business, and one the market is underestimating. Second, that mine will be supported by a 150-kilometre road to port that Prescott believes will cost about $150 million to build, but which MinRes can sell a 49 per cent stake in for up to $1.4 billion.
Finally, there’s the group’s growing gas business, which Prescott says will soon be granted an export licence. He thinks the stock, trading at almost $69, is worth up to $130 a share.
There’s no hotter commodity than copper right now – see BHP’s $60 billion takeover bid for Anglo American as proof – and Prescott sees potential in AIC Mines, whose copper mine in Queensland is set to scale from 13,000 tonnes to 20,000 tonnes over the next few years, with costs falling as production rises. “We think we are buying that company on two to three times free cash flow, which is extraordinarily cheap.”
Qiao Ma, Munro Partners
Data centres are often seen as the picks and shovels of the AI goldrush, but this essential infrastructure needs essential infrastructure, too. Portfolio manager Qiao Ma likes New York-listed Vertiv, a provider of vital cooling systems to data centres to prevent overheating of AI chips. The business was recently spun out of a company called Emerson, and Ma sees the potential for revenue to grow at more than 10 per cent a year, and earnings to grow in the low- to mid-teens over the next few years.
After its staggering 206 per cent share price gain over the last 12 months, the Nvidia growth story is well known. But Ma maintains the company has the potential to double its earnings over the next five years as its AI chips are bought by more and more data centres that need to be upgraded to power the AI applications of the future. On Munro’s estimates, just 20 per cent of data centres around the world are ready to adopt accelerated computing technologies, and that penetration is likely to increase substantially.
Tom Richardson, Paradice Investments
The portfolio manager admits gold miner Newmont has “performed terribly over the last two years despite gold prices hitting all-time highs”, but he argues the acquisitions of Goldcorp and, more recently, former ASX giant Newcrest, have left Newmont with “an enviable portfolio of the world’s best gold mines – long-life and low-cost”. The kicker is an undervalued copper portfolio, which Richardson says should create long-term value for investors.
Oscar Oberg, Wilson Asset Management
The lead portfolio manager started buying cloud connectivity provider Megaport in April 2023 with the arrival of new CEO Michael Reid, and is confident the experienced tech leader has turned around Megaport’s sales strategy. Oberg says Megaport’s global network will give it the chance to ride the AI wave, and disrupt incumbent telco businesses around the world. But he also says the market is underestimating Megaport’s ability to sell more to its existing customer base.
This article was originally posted by The Australian Financial Review here.
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