Why investors need to keep investing in high-quality businesses
Scott McKenzie, co-manager of TB Amati UK Listed Smaller Companies, talks to us about the...
After a two-year hiatus, FundCalibre hosted one of its popular ‘speed-dating’ events this week – but, as usual, romance wasn’t on the agenda: instead, we invited eight financial journalists to have seven-minute interviews with six Elite Rated fund managers.
While the journalists concentrated on getting their investment scoops, we took the opportunity to ask the managers what the two main threats and two main opportunities are for their asset classes today.
Here’s what they had to say:
“If China continues with its ‘Zero-Covid’ stance it will severely impact supply chains for longer – which in turn means inflation will continue to be a problem. While it’s the percentage figure that grabs the headline, it’s just a number – a crude average. What matters is the component parts.
“We have energy inflation, as we are all too aware, and this impacts all sorts of things. We also have food inflation. I could go on. And at some point, this becomes wage inflation. Almost all companies are struggling with staffing already – unable to fill roles. And with other components rising in price, the current wage inflation of 2-3% in Europe needs to absorb the added costs. At some point it won’t. Companies are also not only dealing with rising input costs and the longer-term consequences of central bank response, but consumers will also be strained. Three months ago, no one thought there would be a recession, today it’s a growing concern.”
“There is a growing appetite among companies to reshore or near-shore their activities and supply chains. Globalisation is being unpicked and they are moving closer to home.
“Leading that charge is the semiconductor industry that has been stung by recent events. The geopolitical overlay has caused businesses to rethink, and the world has realised it can’t be dependent on one company. The amount of capital being thrown at this problem is enormous.”
“Oil at this level – around $100 per barrel – is actually ok. India has changed considerably in the past few years and although it’s still an oil importer, it can afford it at this level. But if it goes to $200 it will be bad for everyone, especially India.
“Politics in India have been reasonably stable for a while. Although Indian equities are not dependent on Modi to do well, he does have good PR, so a change would not be helpful. He has won 3 out of 4 local elections recently though so it’s not something we predict – we are just aware that it is always a danger.”
“Investors have ignored India over the past 6 months or so – they had seen it as a trade rather than a long-term investment so were quick in and then back out again. As things calm down, I expect foreign investors to come back, and hopefully for longer.”
“Modi is a reformer, but the reforms have been a bit lacklustre of late. If we got more, then it would be a catalyst for the market to react positively and I don’t think that possibility has been priced into stocks yet.”
“Pension funds and other institutional investors have been structurally allocating away from the UK – particularly small caps – and money flowing out depresses valuations. We really need foreign investors to come back to the market. We are seeing this in the private equity space, but it needs to be more wide-spread.”
“Small caps are always less liquid than large caps but they are also under researched and get less attention. That’s good for us to add value but the overall risk means they are less attractive to investors. So, this is a concern although we think the tide is starting to turn.”
“During Covid the UK private equity market really came into its own, helping firms recapitalise and progress. And people forget that the UK is a dynamic market with a very easy system that works for firms and investors. We’re good at getting capital to businesses. So, I think we need to be on the front foot.”
“Companies across different sectors are feeling the impact of high inflation. This started last year and has been exacerbated by the situation in Ukraine. To mitigate those risks you need companies with high margins and cash flows to deal with the inflationary pressures – as well as the ability to pass on some of the costs to consumers. However, the passing on of these costs need to be at appropriate levels and over time so that the consumer can absorb them.”
“When it comes to supply chains, the pandemic and geopolitics have made companies think more about localisation. And for some this is easier than others. Did you know that there are 400 steps involved in making a trainer, but only 15 for a t-shirt, for example?”
“The recent market volatility has thrown up some opportunities as some very good companies have got a lot cheaper. You have to be very careful and pick the right one – companies that are resilient and doing or making things that people want – but as a risk-management investor that gives me confidence.”
“For small cap managers liquidity is always a threat. You don’t want to be a forced seller and when things get bad it can be very difficult to trade some of these stocks, especially if a fund happens to be in redemption.”
“When it comes to inflation, I think it is slightly easier for larger companies to offset price rises than it is for small caps.”
“Some companies have fallen 30-40% in recent weeks but this means that a number of very high-quality firms are now trading on very attractive valuations. If we really like a company we’ve simply been buying more of it. We’re actually quite bullish in this respect and we’re also looking for companies that can weather the storm as there is so much to worry about right now.”
“A lot of companies don’t have bad balance sheets, so they can cope with interest rate rises, but they will still affect demand as consumers will feel the pinch more.
“When it comes to inflation, you can pick your poison. Companies are faced with having to pay up to keep good people, and have higher input costs, etc. It’s a really tricky environment to navigate at the moment.”
“Out of crisis comes opportunity and we still anticipate that some great companies will come to market. There’s a great book – 100 baggers: stocks that return 100 to 1 and how to find them – that shows if you look back over the past 80-100 years at the US market, in 1968-1982 when the market really struggled, the number of 100 baggers was still as large as in the good times. So, you can still find winners in tough environments.
“And I think we need to believe in people – that we’ll have great entrepreneurs, management buyouts and people using redundancy or a change of job to create something new.”