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By Clyde Rossouw*
Investors face a seemingly endless list of global risks: the destabilising threat of escalating trade wars around the globe; high levels of debt across government, corporate and household sectors; political uncertainty; and potential contagion from recent events in Turkey and Argentina.
The initial boost to US growth from tax cuts earlier in the year is fading. In addition, while we believe global debt levels and late-stage cycle conditions are likely to hold back any significant increases in inflation or interest rates, monetary conditions are tightening in the short term as central banks start to remove liquidity from the system.
The implications are far-reaching for companies and asset prices. The bond markets are already reflecting a more uncertain outlook as yield curves flatten and credit spreads widen. Elsewhere, we have seen volatility in currencies and commodity prices. In equities, cracks are showing in some high-profile US technology stocks that have led what has been a relatively narrow market recently.
To add to the cocktail of uncertainty, increasingly disruptive forces of technological, social, environmental and demographic change mean there is much to make investors nervous.
The market correction in the first quarter of this year is an important reminder of how quickly and significantly volatility can return.
In these uncertain times, we continue to position our portfolio for resilience and structural growth by maintaining our focus on attractively valued quality companies. The characteristics we seek in companies do not change; enduring competitive advantages, high and sustainable profitability, resilient and growing cashflows, low capital intensity and balance sheet strength. In constructing the Investec Global Franchise portfolio, we have carefully combined more established and defensive quality stocks with newer quality opportunities offering faster growth.
Some examples of what we consider to be traditional Quality companies are in the consumer staples and healthcare sectors, e.g. Unilever, Beiersdorf, Nestlé, Johnson & Johnson and Becton Dickinson. They provide defensive attributes and have provided returns that are less correlated with the market. They also offer sustainable and dependable growth as they continue to invest heavily in their brands and in innovation, position themselves in attractive categories, markets and channels, and as global players, benefit from key trends such as ageing populations, wellness and urbanisation.
We have also invested in a new ‘wave’ of Quality companies, still with the quality characteristics we seek, but with faster growth potential. One example is ASML, which has a near monopoly position in the manufacture of lithography equipment, a critical component of computer chip design and production. Their global, dominant position and technological leadership give them significant barriers to entry in an industry with huge growth prospects, particularly when considering trends in digitalisation, and new technologies in areas such as robotics, artificial intelligence, augmented reality and the Internet of Things.
Importantly, what these businesses all have in common is the opportunity for structural growth, with a lower sensitivity to the economic and market cycle.
In these late stages of the bull market, we believe portfolio resilience is more important than ever. We maintain discipline by investing in quality companies at a reasonable price, not quality at any price. Valuations must be properly assessed in context, whether that context be the quality and growth characteristics one is paying for, longer-term history, the wider market or other asset classes. In our view, this helps protect the portfolio on the downside.
In conclusion, as the outlook ahead becomes increasingly uncertain, we believe our focus on attractively valued quality companies will serve our clients well in delivering strong risk-adjusted returns for the long term.
- Clyde Rossouw is portfolio manager at Investec Asset Management