Volatility may continue, but so can opportunities
Volatility is expected to continue into 2022, but that’s no reason to panic, says Kent Chan, director of equity investments for Capital Group’s Global Equity Fund.
In a discussion of the stock market’s rocky start to the year on the Soundbites podcast, Chan said volatility tends to reveal good deals when it comes to investing.
“Where can we find opportunities? That’s really what we’re focusing on now,” he said. “Which companies may have been mispriced? Which companies still have pricing power and can withstand potentially longer inflationary periods? Who will be able to manage higher debt costs and potentially slower global economic growth while generating free cash flow? »
After January’s tech sellout, he’s looking for deals in the digital space, where more and more consumer goods are becoming “smart” products with internet connectivity and artificial intelligence.
“Our cars are getting smarter. Our refrigerators and washers are getting smart.
For that reason, Chan said, semiconductors and chips are “what’s really driving the digital economy.”
He also believes there are promising opportunities in the healthcare sector, supply chain infrastructure and heavy equipment manufacturing, particularly for the mining industry where there has been an “under- significant investment” in recent years.
Overall, however, as global economies continue to intertwine, he focuses less on regions or sectors and more on company fundamentals.
“While 11 sectors lost ground last year, there were still stars inside,” he said. “And where we could think of investing on a regional or local basis, that world has disappeared. They’re going to be the best companies in the world, and you want to be ahead of, invest in, and retain those best companies.
Chan said nothing beats careful analysis when determining where to put investment dollars.
“If I do a sensitivity model of what a good, bad, and really ugly case might look like over the next five to 10 years, I can get a pretty good read on which companies will be relatively better positioned than others. , even in a bad environment. That’s what fundamental analysis will do for you.
He doesn’t expect a smooth ride in 2022 though. There are too many variables, from Covid exits, to inflation, to geopolitical risks, to supply chain contortions.
“All uncertainties point to continued market volatility,” he said.
Chan said that while some investors may have felt spoiled by the stock’s outstanding performance over the past two years, portfolio managers were feeling increasingly stressed knowing that the high-flying performance could not last. eternally.
“Eventually there will be a reversal of the statistical mean. And Mr. Market can be quite harsh when the economy decides to revert to the mean,” he said. “The lack of volatility is unusual and should not not persist. Nothing goes straight up. But, also, nothing descends in a straight line.
He described market volatility as a natural and even healthy part of investing.
“You want volatility to create opportunity. Volatility is part of a rise in stock price. A sharp rise in stock prices creates opportunities to make a profit or take a gain. If you are ready with fundamental analysis and know which companies will be able to handle the volatility, then you know which companies you would want to invest in on the downside.
Likewise, inflation may scare off some investors, but he says it serves a purpose. On the one hand, it proves that the economy is not “broken”.
“The fact that we printed a lot of money in the United States and in the developed West, if there was no inflation, that should worry you,” he said. “Because otherwise you’d have a much bigger problem on your hands.”
He highlighted Japan’s experience over the past 30 years. Despite successive rounds of capital spending, debt, housing bubbles and stock market bubbles, all countered by the impression of “lots of yen”, there are still few signs of inflation.
“We should thank our lucky stars for inflation because, for us, it proves that the system is not broken,” he said.
Another positive aspect of inflation is the ability for businesses to realign prices that have essentially been frozen for the past decade.
“To the extent that inflation will now put pressure on businesses to improve or become more efficient in their manufacturing, if possible, businesses can also raise prices,” he said.
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without the contribution of the sponsor.