Quality Growth Boutique

2Q 2021 International Equity Outlook: Balancing Growth, Sensible Prices and Risk

Outlook

Balancing Growth, Sensible Prices and Risk

Portfolio Manager David Souccar discusses valuations, how to protect against inflation, and areas of the market where investors should tread carefully.

 

  • Some of the worst hit areas of the market, such as hotels and airlines, have rebounded and the market is pricing in an end to the pandemic. We are more concerned with the rate of recovery within sectors rather than regions, even though countries vary greatly in their Covid response and vaccine distribution. Investors should tread carefully with companies whose stock prices have been driven by expectations of a Covid recovery.
  • Valuations in aggregate are at historical highs, with segments such as technology and renewables overvalued significantly. But valuations are reasonable in other areas and investors can still find interesting opportunities. Stock selection is critical in this bifurcated market.
  • Today’s investment landscape is filled with uncertainty around rising interest rates and inflation. We think the best way to protect against inflation is to invest in businesses with pricing power, those that provide unique value to customers, and have resilient earnings growth.
  • Consider two companies in the same industry: Ferrari can protect against inflation while Volkswagon may not. In a highly competitive business, Volkswagen has low margins and profits from volume. Customers will have less purchasing power in an inflationary environment and Volkswagen may be forced to lower prices. Ferrari, on the other hand, produces at a low volume and sustains higher margins. With a two-year wait list for its cars, Ferrari has the option to increase prices to its high-end customers, sell higher value added cars, or even cut supply.  
  • To weather today’s uncertain environment, investors should look for a quality portfolio that balances growth, sensible prices and risk. International equities can provide diversification with exposure to different types of business and growth drivers.

 

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