Q3 2021: the recovery continues
At first glance, the top performing funds on FundCalibre this quarter are an eclectic bunch, with...
With so much going on in the world and different sectors and geographies performing differently, it’s hard to keep track of where the best investment opportunities might lie. So we asked the managers of some of our Elite Rated and Radar Investment Trusts for their views on which are the most exciting opportunities in their asset classes today.
In this first article of a two-part series, here’s what they had to say about Western markets and specialist sectors:
“Large swathes of the UK market remain overlooked, and exceptional value can be found across a broad range of sectors. The current backdrop is highly unusual in the sense that we are not having to compromise on quality and are even able to buy companies that are seeing earnings upgrades but remain very cheap compared to the broader market.
“This is particularly the case among smaller companies and those with more of a domestic focus, such as some of the UK retailers that are seeing increased demand due to the COVID-19 restrictions and the resulting change in consumption patterns. Similarly, some housing-related stocks remain attractively valued and well positioned to benefit from changing accommodation needs, lower rate mortgages and help-to-buy/stamp duty support initiatives. Some of these changing dynamics will be longer lasting than currently factored in and in some cases structural in nature.”
“We think the life sciences sector will see significant government, philanthropic and private investment over the next 5-10 years. Key drivers include funding for better medical preparedness as both the US and the EU have announced programs to create what will effectively be a strategic medical reserve of PPE, ventilators and other medical equipment. We also expect to see more money for research to prevent the next health crisis and think there will be more onshoring of key manufacturing, especially in the US, as supply chains, primarily in drug manufacturing, have been under scrutiny over the past few months.
“Information technology is also driving a structural disruption of healthcare systems. To improve their efficiency, we need major changes in how healthcare is managed, delivered and paid for, and COVID-19 has accelerated many of these trends. For example, we have seen probably five years’ adoption of digital health technology in just three months. Remote monitoring is also becoming more mainstream and the use of real-world data has the potential to transform how medical treatments are evaluated and paid for.”
“Over the last three months we have continued to tilt the portfolio towards ‘global’, ‘digital’ and ‘business to business’ (B2B). As consumers in Europe are getting more squeezed, we think that strong B2B franchises with recurrent demand are better placed to weather the storm than consumer related businesses. This reasoning led us to sell our travel and leisure related investments earlier in the year. Recognising that Asian economies are coming through the covid crisis better than European, we have re-emphasised the ‘global’ aspect of the portfolio. This is reflected in our purchases over the last three months.
“We have continued to build positions in semiconductor related companies. Chief amongst these is S.O.I.T.E.C which has a quasi-monopoly position in a niche area of silicon wafers. Whilst its customers are almost all Asian, its products end up in the hands of consumers (as a component of smartphones) across the world. It is also a ‘play’ on the digital economy as its products are used in new mobile, ‘edge computing’, artificial intelligence and similar applications. Alongside S.O.I.T.E.C, we also continued to build positions in Infineon, a world leader in power semiconductors, and ASML, the Dutch semiconductor equipment manufacturer.”
“Consumer staples companies or makers and sellers of essential products comprised 23% of City of London’s portfolio at 30 September 2020. They include companies in the following sectors: beverages, food producers, household goods, personal goods, tobacco and food retailing. Companies in these sectors were relatively unaffected by the lockdown, their profits and dividends have held up well.
“City of London’s largest three holdings, British American Tobacco, Unilever and Diageo, are consumer staples stocks. They are global leaders, have built brands over decades but need continually to invest in product innovation to grow. In some cases, consumer staples stocks have been positive beneficiaries of the pandemic, such as Reckitt Benckiser, the maker of Dettol, and City of London’s seventh largest holding. Overall, the consumer staples stocks, in our view, form a very good base to a portfolio.”
“While uncertainty is presently high for the global economic outlook, the global small cap field is a broad one, offering opportunities across sectors. At present, we think that there is scope for some of the more cyclical, industrial production driven stocks to do better, as global manufacturing activity improves. For example, in the UK, Vesuvius offers a range of consumable products into the steel and foundry markets. The company is well managed, holding strong market positions with pricing power, and should benefit from an uptick in demand in the coming period. US listed metal working products distributor MSC Industrial Direct should also benefit from a stronger market backdrop.
“We think there are also opportunities in the financials sectors. Flatex has, following the acquisition of a Dutch competitor, DeGiro, transformed into Europe’s leading online broker, with strong positions in Germany, Switzerland and now the Netherlands. Built from a high quality technology back bone, the company is able to offer a great customer experience at a low cost, with a wide ranging of products which should enable it to continue to take share from the more traditional brokers.”
“There has been a very wide dispersion in performance at the sector level with logistics, industrial, healthcare, non-food retail (supermarkets) and private sector residential at premiums to asset value and able to raise capital for offensive acquisition programmes. In contrast, retail and offices continue to suffer negative sentiment with COVID-19 driving an acceleration of online retailing, which is negative for retail, and the balance of working from home and/or return to office affecting the expectation of office demand.
“Our strategy has three strands: firstly, sectors with growth opportunities like logistics, industrial. Secondly, high quality index-linked income like private sector residential, healthcare and supermarkets. And thirdly, overly discounted share prices in sectors with limited short term growth like European offices.”
Find out what our Elite Rated and Radar managers had to say about Eastern stock markets in part two of this series.