Quality Growth Boutique

2Q 2021 Global Equity Outlook: A Quality Focus Amid a ‘Return to Normal’

Outlook

A Quality Focus Amid a ‘Return to Normal’

Portfolio manager Ramiz Chalet explores companies with pricing power that can manage well in an inflationary environment

 

  • The recent value rally has been bolstered by the distribution of the vaccine and the continued strong stimulus, particularly in the US and Europe. Rising 10-year treasury yields and a view that inflation is picking up have driven some of the more cyclical areas of the market. The good news is that this has been due to signs that many economies are recovering more rapidly than previously projected. At the other end of the spectrum, some of the momentum driven stocks of 2020 have pulled back.
  • From a quality growth perspective, we look for companies that have consistent and sustainable earnings growth and we remain cautious on some of those names in the value category. Cyclical value names tend to have low predictability of earnings or returns and it is therefore difficult to take a longer-term earnings view. Others are structurally challenged in their longer-term growth outlook, such as certain developed market financials.
  • The investment landscape is evolving from an extended period where rates have been historically low and inflation has not been a concern. Pricing power is one defense against an inflationary environment. Companies that have pricing power and are in attractive categories should be able to manage well. For example, some consumer staples and consumer discretionary companies are better able to pass on rising input costs and protect margins, and even take pure price increases.  
  • As vaccines roll out in an accelerated fashion, particularly in the US, we believe travel-related stocks will normalize to 2019 levels in 2022. Companies exposed to improvements in travel should benefit. Further, cost initiatives implemented in 2020 may improve margins. However, investors should remain cognizant of valuations, as some stocks are trading above their pre-COVID levels and have already priced in a recovery.
  • Markets are not yet fully pricing in normalization in the consumer staples sector, particularly in the area of out-of-home consumption, which typically has higher margins and can represent one third to 40% of some consumer staples businesses. We expect growth to recover meaningfully in this segment as restrictions are loosened on restaurants and bars.
  • Recovery will not be uniform across regions. Developed markets have had more resources to counter the pandemic crisis, while emerging markets are a mixed bag. Several countries in Asia have been less impacted and thus have been more restrained with respect to fiscal and monetary support, while others in Latin America, such as Brazil, have been heavily impacted and now have less room for stimulus. Countries such as India, with a large informal economy, had to ‘return to normal’ rapidly and could see a strong rebound following last year’s sharp contraction.
  • In emerging markets, we find the China internet space interesting because regulatory risks seem to be more than priced in and the fundamental growth continues to be strong. And, in our view, leading private sector banks in India still have a long runway in terms of market share growth, have new emerging growth drivers, such as asset management and insurance, and valuations are still quite reasonable.

 

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