Portfolio Manager Chul Chang discusses valuations, opportunities in technology and industrials, rising debt levels and ESG considerations.
After the pro-cyclical start for markets in 2021, there has been a shift to high-quality, defensive names, as well as a greater focus on growth areas, such as technology. The cyclical rally may not be over, although some investors may take profits and continue to move into defensive stocks.
Better than expected company earnings have helped valuation levels. However, low interest rates have also been a driver of US stock performance. Historically low rates and historically high margins may be headwinds for companies going forward if they mean revert. Investors must remain vigilant around company fundamentals. While valuations can help determine the sizing of positions, investors should focus on selecting the right business with earnings power and remain invested for the long run. We believe stable and predictable companies that are steady compounders are more attractively valued compared to companies with more erratic
The trend towards technology that sustains higher productivity and efficiency should continue to play out. Good quality growth can be found not only in technology, but also in other sectors such as industrials.
Some companies that sell software or cloud subscriptions may be less affected by inflationary and labor pressures, but most companies are dealing with the issues to some extent. Home Depot, for example, has invested in supply chain and logistics enabling it to procure merchandise, ensure delivery and take market share from smaller competitors. Companies that don’t have pricing power (such as those selling commoditized products) are at risk, while companies with strong brands and differentiated products should benefit.
Potential tax rises will affect almost all business but will vary according to industry. We will do our due diligence to assess any potential for outsized impact and focus on strong companies with competitive moats that can grow over the long run.
Rising debt levels in the US can be a headwind to future growth. There are other economic challenges, including deglobalization and slowing emerging markets growth. We believe a defensively positioned portfolio can provide comfort amid uncertainty.
Climate-related considerations and ESG more broadly are important to investors. We are seeking companies that are ahead of the curve on these topics. More companies are moving from fulfilling a checklist and providing disclosure to setting targets and making progress.
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