Fifi Peters: 2022 was a terrible year for the stock markets, both domestically and abroad. For a perspective on how difficult the year has been and where opportunities still exist in the marketplace, join me Clyde Russo, Co-Head of Quality at Ninety One.
Clyde, thanks so much for your time. Let’s start with a quick global perspective, given that you run Ninety One’s Global Franchise Fund, which itself invests in global stocks. What do you think of how the year has passed so far?
Clyde Russo: Yes, Fifi, you are right. It has been a difficult year for investors. There was no hiding place within the broader markets. Stocks go down across the board, global stocks go down,[inaudible] Stocks are going down – and depending on what currency you measure it in, there could be little or a lot of money getting lost.
So I think the main point that was driving all this is not necessarily about the basic fundamentals of earnings and earnings growth, which [are] It is still relatively strong. I think the bigger problem is the fact that people were worried about inflation, they were worried about interest rates, and higher rates usually lead to lower multiples. In other words, people are willing to pay less money for the same unit of cash flow that they would have paid earlier, a year ago. So you had a drop in stock prices and that was the main driver behind the stock market weakness.
I think it’s important for investors to remember that good business will still be able to grow, even in the current environment.
So one has to be careful in making very large predictions about stock levels, and instead make sure that you focus on individual companies in making your investment decisions.
Fifi Peters: What is good business in this environment?
Clyde Russo: Look, we like to focus on companies that we think can navigate the macro environment better than others. So in simple terms, if you kind of think about it, these are usually companies with very strong competitive advantages, these are usually companies with dominant market shares.
They are able to grow even in challenging market environments. They usually have a relatively low sensitivity to broader markets, financial markets, and economic conditions. It does not require a lot of capital to invest it to grow. The money they generate usually returns to us as shareholders, either in the form of dividends or share buybacks.
This is the kind of business we are looking for.
Fifi Peters: And how do you feel about the sectors involved, starting with technology? One of the biggest beneficiaries of the Covid-19 boom we’ve seen in stock markets hasn’t quite benefited from the reversal we’ve seen so far this year. Do you see any opportunity in technology nowadays?
Clyde Russo: you are right. The conditions driving the technology’s performance in 2020 were very different from what has been driving the markets this year. The big difference is the fact that you don’t have what I would call capital rewriting liquidity into support. In 2020, all central banks cut interest rates; They put a lot of money into the financial system. This throughout the year is actually a reflection. Money is leaving the financial system, and rates are going up. Very different fortunes.
I think, again, that in technology it’s important to differentiate between companies that lose money but have the promise of a better future somewhere in the future. Investors are not willing to fund these companies anymore. So [with] The likes of Twitter with marginal profitability, and a lot of stocks with that kind of characteristic, the market just doesn’t have the same patience this year as it did back then.
Let me give you one example of a job we love. Our biggest company is Visa.
It is a technological work. Despite all the innovation happening in cryptocurrencies with Bitcoin and Ethereum and a lot of news flowing this week, the Visa card network can still process 1,700 transactions per second, while Bitcoin can do seven…
This is a company with a dominant market share, which is 50% share of credit cards worldwide. The network is growing. It is an inflation-resistant business because it takes a percentage of the value of the transactions made. As long as people pass their credit card somewhere at the merchant, whether it’s inflation or whether it’s real, it doesn’t matter, [Visa] He’ll still get a percentage of that. Over time, they generate good margins and have nothing to do but return the money, and surplus cash, to us shareholders.
So this is a field of technology that we love. It generates liquidity today, and it has a very strong and good growth pipeline over time.
Fifi Peters: Good. So I imagine Visa is one of the companies in the box right now. But what other traits and collectibles do you have outside of technology?
Clyde Russo: That’s a good question because, if you look at South Africa, you’ll find that South Africa is kind of lacking in structural growth stories right now. At least when you look at the international environment, there are a lot of sectors that [are benefiting from a] background wind.
You have clearly spoken about Visa, which is a leading payment company. If you look at Prestige Beauty, for example, we’ve got a big hub. [There is] Estée Lauder, which manufactures premium skincare, makeup and cosmetics.
The need to invest in better looks in the future does not diminish. In fact, people are spending more money on their faces and skin than ever before. So this is the structural engine that we love.
We have invested in a semiconductor equipment manufacturer called ASML. It essentially provides a monopoly on the tools that will create the next generation of semiconductors around the world, a very specialized company with 100% market share.
Then there are companies that are also benefiting from climate change. So we have a software services company called Autodesk that is really driving computer design innovation in creating blueprints for the most energy-efficient buildings.
So there are a lot of businesses with very attractive properties that one can still invest in with a good structural tailwind.
Fifi Peters: Good. Finally, back to where we started, just thinking about the dips we’ve seen in most stock markets this year, do you think it’s happened now, and are you optimistic about the future?
Clyde Russo: I think the point here is to really think about the next level of surprises [the] Interest rate, because we all know this week is going to be a big week for interest rates. The Fed is meeting, many other central banks are meeting, and there is a lot of upward pressure on short-term interest rates. Obviously, the difference there is that long-term interest rates seem to be finding a level.
We are watching US 10-year interest rates closely. They sit at 3.5%. Mortgage rates are 6%. So we do not believe that stocks or shares should necessarily become cheaper than the current level.
If we see it in the second half of this year – we expect the inflation rate to fall; we We’re seeing energy drop, oil going down, we’re starting to see signs that we’ve reached peak food inflation – [and] As inflation subsides, it will take the pressure off the interest rate system, so the valuation multiples no longer need to be compressed.
So this is what I was looking for. Obviously it’s early days. We are in that upward period. Meanwhile, we think the important thing for investors to remember is to look for companies that actually, like I said, are profitable for companies today, where there’s less risk around the earnings profile.
Fortunately, we can find companies that – even if stock prices are a little lower at the end of this year – have obviously made up a lot already this year, [so] You will not lose money because the growth in profits will compensate for any ebb that may occur in the marketing environment.
Again, that’s what we encourage investors to keep thinking about.
Fifi Peters: Good. Clive, thank you very much for that perspective. We’ll leave it there. Clyde Russo is the Co-Head of Quality at Ninety One.
Brought to you by ninety-one.
Moneyweb does not endorse any product or service that is advertised in sponsored articles on our platform.