Six ways to invest in an inflationary environment
UK inflation rose to 9% in April, its highest level in 40 years and almost double the rate the Bank...
It’s Black Friday this week and, according to research company Statistica, UK consumers take the event quite seriously. This year, the UK has accounted for more than 10% of all global Black Friday searches online and Brits are forecast to spend a record amount.
But while many of us will spend just a few days scouring the internet for bargains and others will be braving the shops and crowds this weekend, some people look for bargains all year round.
We spoke to a number of Elite Rated managers to find out what their best bargain stocks of 2021 have been.
“This year we have noted a number of compelling opportunities in Japan. The market has long been a value trap, with cheap valuations on offer but many investors being put off by some of the traditional governance structures associated with Japanese companies. While some of these risks remain relevant, we believe these are both changing, and that valuations more than account for the concerns.
“We purchased Nikon, the Japanese camera manufacturer, in January. We were attracted to the company’s strong balance sheet, but new earnings were challenged. This year shares have rallied 90% and we have trimmed our position twice to manage risk.”
“Early in the year we added Ashtead, the US-focused heavy equipment rental firm, to our fund. Since then, its shares have risen by around 60%, benefiting from a strong bounce-back in US construction activity as the economy reopened.
“Thinking ahead, the trend towards renting, rather than owning, equipment like excavators, aerial work platforms and generators shows no signs of abating, and President Joe Biden’s plan to upgrade the US’s ageing ports, bridges and roads could add yet a further leg to growth. With the shares having performed so well this year, a compelling valuation case is now harder to make, but Ashtead’s strong growth prospects and solid balance sheet mean the stock retains its place in our fund.”
“ASMI is a Dutch semiconductor company. We believed the significance of its decades long research and development in epitaxy and ALD technology (atomic layer deposition– a key process in fabricating semiconductor devices) for the global semiconductor industry were under-appreciated by the market at the start of the year. The shares traded at less than half the valuation of its European and US peers but have more than doubled in 2021.”
“Life insurers have done very well for us this year – both Legal & General and Aviva have been among our top performance contributors. Since the global financial crisis (GFC), the market has been consistently negative on the financial sector, which it sees as overregulated and complicated. While the regulatory environment is complex for both banks and insurers, we believe this offers opportunity, especially the post GFC introduction of solvency 2 in the life insurance space. This, and strong capital generation of the insurers over the last decade, led us to believe life insurers would prove much more resilient to a crisis than banks, which has subsequently been proven correct through the Covid-19 pandemic.
“While banks had to make sizeable provisions, which hurt their profits and they had to cut dividends, life insurers did much better, with holdings Legal & General and Phoenix continuing to pay dividends. While Aviva initially cut its dividends, this wasn’t actually necessary, and it has since paid a catch-up dividend and announced significant share buybacks. Under its new CEO, it has also made significant progress in refocusing its business and disposing of businesses outside its core markets. While these stocks have performed well, their valuations are still very attractive and do not reflect their positive earnings outlooks and the healthy demand for protection products, bulk annuities and
pension de-risking. They have strong balance sheets and offer very attractive dividends.”
“Somero is a dominant global manufacturer of concrete-levelling products, critical for the building of warehouses used to fulfil e-commerce orders. At the onset of the pandemic – and for Somero in particular – the cyclical downturn in construction spending led to a few quarters of falling demand and the shares got hit very badly. We saw this short-term difficulty and an opportunity, and over 2020 we added significantly to our existing position. Over the last year, a combination of cyclical recovery and a structural element of increased demand for their products has seen a share price rise of over 150%.”
Hugh told us more about this in his recent podcast:
“It is in the energy sector where we have found some interesting contrarian opportunities. One of the issues with the ESG Klondike-style bonanza is that it is polarising, not just in societal terms but in investment terms too. Mindful of the difference between looking good and doing good, it is possible simultaneously to invest in a hydrocarbons business and do good.
“Take Lundin Energy for example: the company’s decarbonisation strategy is one of the clearest and most convincing we have encountered. It has set a target for carbon neutrality from 2023 across its operations. The boundary of its neutrality target is Scope 1 and 2 emissions and Scope 3 emissions related to its supply chain (vessels, logistics and business travel). Further, the company has set an absolute emissions reduction target for net Scope 1 and 2 emissions of 50% by 2023, from 2020 levels. This puts Lundin on track to meet the targets of the Paris Agreement much earlier than required. Lundin is a perfect example of what we mean when we describe our approach and our commitment to ESG investment: it is ESG by impact not by exclusion.”
“We bought Orix, a leading Japanese financial services group, last December at 6.6x price-to-earnings ratio and it is 10.9x now*. The stock has risen 53.2% vs. the 18.3% of the TOPIX index since then^ and its earnings have also grown over the same period. “Orix’s profit growth and reassessment by investors reflect its growing presence among Japan’s under-served small companies for financial services from leasing, loans to real estate introduction and private equity, and a sharp benefit from Japan’s economic normalisation after Covid-19. The company’s worldwide renewables portfolio, with the largest (3 Gigawatt) solar capacity in Japan and stakes in Ormat, Elawan or Greenko, should enhance its growth in coming years.”
“Zuora is one of the leading cloud-based subscription management platforms. We see Zuora going after a large $20 billion+ total addressable market (TAM) with secular tailwinds from companies adopting subscription business models, as businesses of all sizes are moving toward subscriptions as a better way to have relationships with customers. With less than 1% penetration and a strong competitive moat, we see sustainable 20% revenue compound average growth rate over the next 15 years. Moreover, we think the company is potential acquisition target for a range of large
*As at 5 November 2021. The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation and shows what the market is willing to pay today for a stock based on its past or future earnings.