On 29 April, GAM Investments hosted an event titled ‘The Game Changers: Equity Alpha in 2021’. Led by Matt Williams, Head of Equity Investment Specialists, three of our investment experts, Jian Shi Cortesi, Mark Hawtin and Niall Gallagher, shared their thoughts on the changing opportunity set they believe may help in generating alpha.
The Covid-19 pandemic transformed life as we know it. It halted the course of economies and pushed many businesses in the old economy to the point of collapse. With the pandemic waves having a profound impact they have caused two extraordinary game changers; traditional ways of life have been stopped in their tracks, and the sheer scale of government support to return economies to growth has been and will likely be extensive. Interest rates, inflation and future stock market conditions now exist amid a completely new narrative compared to that which we saw in 2019. To aid investors in navigating these unchartered waters, three of our equity investment experts gave their outlook for the coming year.
Niall Gallagher – Investment Director, European Equities
A strong rebound in economic growth is beginning to launch and we believe this will be much more significant than those following previous downturns. On top of this, the nature of the downturn itself will cause the rebound to be much faster, in our view, mostly due to the fact that consumers were prevented from spending rather than actually not wanting to spend but also the huge government stimuli – both of which have left a massive amount of pent-up savings in consumer bank accounts.
We are partway through the earnings season in European and US equities which have only confirmed there has been a very strong acceleration in earnings growth. In my opinion, this is a strong growth environment, particularly for cyclicals and within some of the value type stocks, for example, good quality companies have gone from 15 to 20 to 25 to 35 times earnings. However, danger lies in valuations, as some have been pushed up by very low nominal yields.
One sector we are paying special attention to is luxury. There are some strong secular structural trends that are driving growth, one of the most significant being the growth of the Chinese and Asian middle class. Numerically, given the number of new middle class and affluent consumers in Asia, growth can only continue. On top of this, last year many Chinese nationals who would have travelled to Europe and the US especially to buy luxury and duty-free goods kept buying locally and so we have seen a continuation of very strong local growth from the Asian consumer.
Alongside the growth of the Asian consumer, there has also been a trend of the European consumer returning to buying more locally, using ‘tried and tested’ luxury brands, meaning what could have been a weak year for luxury brands, was, in fact, the opposite. Overall, we believe there are strong opportunities in European luxury stocks.
In Europe, in our view, there are also good opportunities in decarbonisation initiatives. One of our largest investments is in a global leading installer of building insulation – about a third of our emissions come from the built-up environment and so the move to carbon-neutral buildings will likely grow. Semiconductors present opportunities too; we believe they will see significant growth from the electrification of the car fleet globally, and Europe could be among the main global suppliers.
In terms of risks, one of the largest we are wary of is inflation and if the huge stimuli cause it to persist. Certainly in the results we are seeing signs of higher inflation, whether this is temporary or not it is something we continue to monitor.
Jian Shi Cortesi – Investment Director, Asian Equities
Our strategy benefited from companies related to e-commerce online services and cloud software, however, after strong share price performance, many of them are now trading at valuations that do not offer much downside protection, in our view. In this environment, as we have always focused on the growth areas such as consumer and technology, we are constantly on the hunt for companies with decent growth that still trade at attractive valuations.
With this in mind, large-cap pharma names have piqued our interest. You might assume the pandemic was good for pharmaceuticals – and biotech names did rally – but for pharma companies, it meant people did not want to go to the hospital. Treatments were delayed, as was drug development. These companies are trading at quite low valuations, and therefore this year could represent a good environment, in our view.
By mid-way through Q2 last year, China’s GDP had rebounded to positive growth. The only area that is still lagging is travel. In terms of domestic travel, we are seeing projected numbers to be higher than two years ago, but international travel is essentially sterile. Overall, in our view, there are still some companies that are trading at attractive valuations, including airports or online travel platforms.
Last autumn, China announced an ambitious plan to become carbon neutral by 2060, meaning clean energy will transform from a peripheral source of energy to the main source. And for China, this reaps not only environmental benefits but also could be extremely lucrative. China’s manufacturing capabilities means it is positioned very well. If you buy a solar panel or wind turbine, it was most likely made in China. The country has achieved the highest wind capacity in the world, representing about 40% of the world’s wind capacity. It also has about three quarters of the world capacity to create lithium batteries, meaning Chinese auto will likely present opportunities.
Many investors are not fully aware of the growth potential of Chinese companies. There were more Chinese companies among the Fortune Global 500 companies than US firms last year, and considering China is expected to overtake the US in terms of GDP in eight years, in our view, it seems a logical area to consider in allocating funds.
Mark Hawtin – Investment Director, Disruptive Growth
Key drivers of change at the moment are what we consider to be the fourth generation of the digital revolution led by the Internet of Things (from 5G to big data and AI); it will likely drive significant change in industrials, healthcare, transportation, and also FinTech.
From an investing perspective, the theme of growth provided by some of the biggest disruptive technology opportunities is so significant it can displace any detrimental impacts of rising interest rates, in our view.
It is important to point out that regardless of the length of any cyclical, economic re-opening bounce-back period, the underlying opportunity in structural growth is not altered. The market is so often a voting machine and valuations can get distorted by short-term factors; companies which struggled amid the crisis because they saw short-term downturns in fortunes (like travel for example), now look attractive. Expedia struggled when air travel, in particular, collapsed. This created strong upside within our models which are built on intrinsic valuation, deliberately looking beyond short-term factors. This created an opportunity to buy some companies at very attractive valuations and gain exposure to that economic recovery at the same time.
One of the trends we are watching closely is the way in which large scale data sets can be used in manufacture to improve productivity and reduce costs. Less obvious opportunities within software and artificial intelligence (AI) are also presenting themselves. For example, from a security point of view, operating within the cloud can provide a higher secure environment as huge amounts of data can be used and analysed seeking to effectively predict security threats before they manifest themselves. In essence, the ability to prevent an attack is far more powerful than dealing with the threat once it is at the firewall. Other areas in which data sets are creating game-changing opportunities are in sensor technologies where the data collected at the sensor point can be analysed and used to drive different outcomes in things like commercial fleet management.
One such example is in the Chinese commercial trucking market. Annually, approximately a trillion dollars is spent on shipping goods in China solely around the roads in the country itself, which means the opportunities presented by the use of AI and software to solve trucking and logistical challenges are significant, in our view. With the consistent aim to be ahead of the curve on new opportunities, we believe China will be a source of strong alpha in the coming years for disruptive growth.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.