On 14 May, GAM Investments hosted an event titled ‘Recovery, Rebound and Rotation’. Three of our investment experts, Mark Hawtin, Swetha Ramachandran and Chris Sellers, discussed equity market rebounds and rotations and shared outlooks for their respective asset classes going forward.
Mark Hawtin, Global Equities
We look at the global equity universe through a disruptive growth lens in order to identify long-term success stories. We aim to find companies that are themselves disruptive, either through specific use of disruptive technologies or via the adoption of technologies in business models that create significantly better sales / profit outcomes than expected by the wider market. The potential for us to create alpha not only derives from the information technology space, it stems from multiple sectors. Over the last 10 years, the world has changed dramatically. Previously only clear-cut technology names were thought of as tech stocks (such as software companies). However, the biggest tech names are now companies like Amazon, Tesla, Facebook and Alphabet (Google) which all use technology to drive their business models. Our aim is to identify companies that are putting disruption and technology at the core of their business models.
The pandemic resulted in tremendous returns for investors exposed to ‘work from home’ (WFH) and e-commerce names. A rising tide lifted all boats – the quality of underlying e-commerce platforms did not appear to matter, names did well regardless as there was simply no other way to shop. Going forward, we believe companies embracing the fourth digital wave driven by 5G, big data and AI will prosper as we move further into the world of the ‘Internet of Everything’. We believe the largest opportunities for generating client alpha currently can be found in industrials, healthcare, transportation and financial technology. While there are select consumer opportunities with plenty of mileage, from a disruptive perspective we believe the business-to-business segment has greater potential at this stage.
Globally, we expect to see a huge polarisation between winners and losers over the next decade with a divergence between those who embrace technology and keep at pace and those who do not. There are also regional characteristics to consider. In Europe, for example, there is a notable amount of innovation occurring across the continent but companies are struggling to make it to the public markets - Europe’s initial public offering (IPO) market lags the US, for example. We believe the special purpose acquisition company (SPAC) market could be pivotal for innovative unicorn companies and, as a result, Europe could be a surprisingly large opportunity for disruption over the next three to five years.
Swetha Ramachandran, Luxury Brands
Luxury tends to be thought of as items like Rolex watches or Hermes bags and while these are important, such products make up only around a quarter of the industry. There is a whole swathe of sub-segments that tend to be overlooked, such as premium skincare or premium sporting goods.
The Covid-19 pandemic hyper-polarised the already existing gap between strong luxury brands and weak brands. Consumers flock to ‘tried and tested’ brands in times of crisis and, as we emerge from the pandemic, the gap is showing no sign of narrowing: LVMH’s fashion and leather goods division recently posted Q1 2021 revenue growth of 52% versus 13% for Salvatore Ferragamo, for example. Therefore, bottom-up stock selection is essential in generating client alpha. Over the last year, we have favoured the ‘soft’ European names, such as LVMH and Kering; these companies have top-line momentum and we believe profitability from this segment of the market will continue to exceed market expectations over the next 12-18 months. As economies reopen and excess savings are being unleashed, the upturn in discretionary consumption has shown growth is not concentrated to any singular sector, as shown by positive results from Sonos, Estee Lauder and many others.
The ability to keep up with the pace of change has proven crucial for those companies achieving higher than average returns. Companies with deep-rooted legacies, such as Tiffany & Co or Hermes, previously had a tendency to rest on their laurels somewhat due to their clout. Prior to the pandemic, on average these companies saw around 12% of sales derive from e-commerce, but over the last year, such sales have more than doubled. It is clear companies are becoming much more agile in terms of how they think about digital sales. Most now regard online as a significant opportunity to further develop customer relationships, not merely a transaction portal. Many companies are striving to become more agile and are doing so through the adoption of cutting-edge technology, one such example being the recent establishment of the Aura Blockchain Consortium involving LVMH, Prada and Cartier. With the widening gap of winners and losers in the luxury space set to continue, brands will increasingly have to innovate in order to capture consumers’ attention.
Chris Sellers, European Equities
Importantly, we do not identify ourselves as value or growth investors. We have a preference for companies that make superior returns via lower cost of capital. The European equity market has a universe of 1,500 companies and more than a quarter have never received a return on capital in excess of their cost of capital at any point in the last 10 years. As a result, we have a unique opportunity to generate alpha as active managers. A passive product mirroring the benchmark will always be weighed down by these so-called ‘zombie’ companies.
Europe’s vaccine rollout looks to now be on track and should be in a good place in the third quarter of 2021. In that context, there are some interesting investment opportunities in Europe; we argue that select WFH names that did well during the height of the pandemic look likely to continue posting strong results. It would be a mistake, in our view, to think a wholesale regime change away from 2020 will occur this year and into 2022.
Meanwhile, Europe continues to be a global leader in renewable energy and there is a great deal of innovation taking place. This is where we aim to actively extract opportunities. Environmental, social and governance (ESG) metrics are a good indicator of responsibly run companies. On average, most European companies have excelled in the ‘E’ factor. The majority of large-scale renewable operators are based in Europe, such as Ørsted (a leader in wind development), and the continent is rich with sustainable innovation leaders compared to the rest of the world.
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.