Global Insights

What is the market not getting right?

Moderated by Simon Brazier, Co-Head of Quality. Featuring: Abrie Pretorius, Portfolio Manager, Global Quality Equity Income; Ben Needham, Portfolio Manager, UK Equity Income.

17 Jun 2022

2 minutes

Abrie Pretorius
Ben Needham
Simon Brazier
Moderated by Simon Brazier, Co-Head of Quality. Featuring: Abrie Pretorius, Portfolio Manager, Global Quality Equity Income; Ben Needham, Portfolio Manager, UK Equity Income.

The fast view

Assessing the current market

  • Global equity markets have been exceptionally volatile this year as the crisis in Ukraine has taken centre stage against a backdrop of inflationary pressure and supply-side constraints. 
  • The UK equity market is comfortably outperforming the US this year, a reversal of recent history when looking across time periods ranging from 2, 5 or even 20 years.
  • In parts of the market, there has been a disconnect between share-price performance and underlying fundamentals. We believe the latter will be the dominant driver over time. 

Earnings expectations look excessive

  • Despite the headwinds, the market expects 2022 earnings to be 50% higher than in 2019. Intuitively, it does not make sense to us that the average company has so much more earnings power.
  • We believe it’s best to focus on reasonably valued companies with the ability to compound dividends and earnings over time. We prefer companies with strong competitive advantages that are sourced from intangible assets, such as brands and patents rather than trucks or buildings.
  • These companies build sustainable businesses due to innovation that is not only creating barriers for competition but also pricing power, something we define as the ability to increase prices enough to drive real cashflow growth. In our experience, they can remain market leaders for decades.

The oil conundrum

  • It’s perfectly plausible to make an argument that oil equities can rally during an inflationary environment, but the sector also has its drawbacks.
  • As prices rise, so do reinvestment requirements, which can eat into the elevated earnings and cashflows of businesses with high fixed cost bases, such as oil & gas. We prefer companies with low reinvestment requirements and assets dominated by intangible items, such as patents, trademarks, and copyrights.
  • The lack of counter-cyclical investment in the oil & gas sector is disappointing. 2020 was a great opportunity to allocate capital for growth, but balance sheets would not allow it to happen. Instead, pro-cyclical retrenchment, positively correlated to the fall in oil & gas prices, ensued. We would welcome counter-cyclical investment in this sector.

Where to find opportunities

  • Value can be found in companies that will see revenues and profits rise as their markets recover following COVID. In addition, some core defensive growth companies have derated without any underlying change to their fundamental strength.
  • Although many companies have experienced short-term relative performance headwinds, we believe those companies that are well-placed to navigate the geopolitical stress, economic uncertainty and structural change that may lie ahead will be rewarded by the market.

All investments carry the risk of capital loss

Authored by

Abrie Pretorius
Portfolio Manager
Ben Needham
Portfolio Manager
Simon Brazier
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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