Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Tom Walker, portfolio manager, Martin Currie Global Portfolio Trust.
The second half of the year has seen the global economy looking vulnerable once again. The knock-on effects of the Chinese slowdown have been felt across the world, while uncertainty over US interest-rate rises has further fuelled volatility. This has impacted equity markets globally.
Since making gains earlier this year, stocks have fallen from their April highs. Emerging markets in particular appear to have taken a step backwards. The focus on whether the US Federal Reserve will raise interest rates has been obsessive, although I suspect that, whenever the rate rise comes, it will be small.
Current conditions do not favour companies whose fortunes are extremely sensitive to economic activity. I am not expecting a significant recovery any time soon. However, firms with strong cash flow, cost discipline or niche revenue opportunities continue to be attractive where valuations are appropriate.
This is a low-growth environment, but there are opportunities to be found. Companies that can take advantage of the current economic conditions, or can demonstrate they are able to see through them, are well placed to prosper.
American clothing and home goods retailer TJX (NYSE: TJX), which sells discounted brand-name products, is an example of this.
While some large US retailers have struggled, the company, best known as TJ Maxx (TK Maxx in Europe), has performed well, reporting strong US and European sales in its most recent results. Retailers with differentiated product, efficient supply chains and keen pricing can prosper even in times of austerity.
In some cases, shares have been sold down too far on general macroeconomic concerns. A case in point is ARM Holdings (LSE: ARM), which designs low-power microprocessors. Concerns over the slowdown in China (an important market for smartphone growth) led to a 30% drop in its share price in the first nine months of the year. This threw up an attractive entry point at which to buy a highly rated company.
Many consumer staples stocks rely heavily on increasing their penetration into emerging economies for growth. This is challenging at the moment, given the squeeze on consumers in many of these countries. Anheuser-Busch InBev (NYSE: BUD), the world’s largest beer maker, has a long history of growing through acquisitions.
Its proposed takeover of SAB Miller would see the new entity take up a sizeable part of the market and become the biggest consumer staple company in the world, with a market cap approaching $200bn. This is bold, but management have proven themselves adept at creating value from large acquisitions in the past, although it may take time to deliver the required returns from a deal of this size.
In uncertain times, companies have to work harder to demonstrate to investors that they have attractive long-term prospects. Social media is a “disruptive technology” in its relatively early stages: it is changing how we communicate and how companies advertise.
I believe Facebook (Nasdaq: FB) is exploiting this phenomenon to best effect. It is improving engagement with its customers and finding new ways to monetise its platform. Instagram, which was acquired by Facebook in 2012, has seen massive growth in active users, surpassing 400 million in September.