Over the past two years, investors may have struggled to pick a winning global equity strategy. The constant arrival of new Covid-19 strains, lockdown restrictions, as well as unprecedented monetary and fiscal measures have made the asset class challenging to navigate, say Mark Denham and Obe Ejikeme, fund managers at Carmignac.
The world however remains testing, with the emergence of the Omicron variant and growing inflationary pressures providing several headwinds for global equities. However, there are certainly opportunities here.
High-quality businesses for the win
2021 began on an optimistic note, with global growth peaking in Q2. The remainder of the year was subjected to new Covid-19 stresses and the withdrawal of monetary support, the combination of which will inevitably lead to a continued slowdown in global economic growth in 2022.
To overcome upcoming headwinds, global equity investors would do well to focus on high-quality global businesses that boast three important criteria; long-term growth potential, sustainable profitability, and consistent reinvestment. Large-cap, highly liquid companies in developed markets tend to fit this bill, and should offer good long-term prospects in a challenging and uncertain environment.
Technology is a sector that looks distinctly attractive in this sense, with some of the industry's biggest names demonstrating how companies can consistently showcase sustainable profitability. Microsoft has a growing offering of products and services, a proven ability to adapt even during difficult market cycles as well as a strong and sustainable business model, meaning the technology giant should be in a good position given the slowing growth outlook.
Healthcare is another interesting sector that has proved its resilience. The industry continues reinvestment in research and development, which translates into a dynamic pipeline, and is attractive for investors especially on the back of heightened awareness due to the pandemic.
One may also want to look at high-quality companies that are considered ‘reopening trades', or businesses that have been adversely affected by the pandemic but have the potential to turn a corner and offer impressive returns as the impact of Covid-19 fades.
Amadeus, a major Spanish IT provider for the tourism industry, is a good example. Performance has been poor as the wider travel sector fell victim to the pandemic and still remains hampered by uncertainty.
However, we believe the company's valuation is overly discounted and does not reflect the likelihood of a rebound in demand as travel resumes.
Other reopening trades include the foodservice company, Compass Group, which has recently announced a return to 88% of pre-Covid-19 revenue. The Group's sustainability credentials are strong, having catered for COP26, hosted the "world's first net zero carbon major football match" in September, and rolled out a new eco-labelling scheme across 300 UK business and industry client sites.
It is important to keep in mind that the current environment discourages short-term outlooks on global equities, with a long-term, five-year horizon on global equities a necessity for sustainable returns.
De-emphasise cyclicality
With growth decelerating next year, it is equally important to reassess defensive measures as well as opportunities.
The constant arrival of new Covid-19 variants, ever-changing restrictions, and exceptional fiscal measures have highlighted the importance of flexibility within portfolios. Over the past year, we have de-emphasised the more cyclical holdings as they are more sensitive to economic activity. Take the banking sector for example, if an investor is overly exposed to names in this space, it would be wise to balance it out with less sensitive holdings, such as technology, healthcare, and software.
Those hoping for a smooth ride in 2022 will likely be disappointed. News surrounding the Omicron variant is just one sign that global growth will stutter this year.
However, if global equity investors stick with names offering the winning formula of long-term growth potential, sustainable profitability, and reinvestment (all the while keeping an eye on the bigger picture and adjusting holdings accordingly) they should celebrate next Christmas when they leave 2022 in a stronger place than they started.
By Mark Denham and Obe Ejikeme, fund managers at Carmignac
