Amid lingering fears of stagflation and a possible recession, investors are hard pressed to find opportunities in today’s markets, if any. Market experts at JP Morgan Asset Management believe that those willing to look at fundamental factors underpinning equities, also in Europe, can find ways to enrich their portfolios with some specific quality growth stocks if they know where to look.
JP Morgan AM on Tuesday kicked off its Benelux Mid-Year Outlook Tour with a presentation in Luxembourg. Similar events in Amsterdam and Brussels will follow in the coming weeks.
Ahead of the tour, JPMAM ran a survey on LinkedIn, asking its followers to pick one of three possible economic outlook scenarios. Half of the 138 people that answered picked the ‘bad’ option, pointing to stagflation. The ‘ugly’ scenario - a deep recession - was chosen by 26 percent, while 22 percent marked their confidence in the ‘good’ scenario, expecting continuing GDP growth.
The answers of the JPMAM professionals, without hesitation, fell into the least chosen optimistic category. Seeing continuing resilience in consumer spending, good capital expenditure and “easy” fiscal policies, the firm is upbeat about global growth prospects, despite severe inflation, tumbling markets and the prospect of higher interest rates in Europe and the US.
Emerging markets most exposed to inflation
“We’re facing a major economic shock at the moment but we came into this crisis from a position of strength,” Vincent Juvyns (photo right) global market strategist at JPMAM, told an audience of Luxembourg-based investment professionals. “Without the war in Ukraine we would not be talking about inflation today.”
Emerging markets are most exposed to persistent inflation levels, especially given that the commodities markets still have to deliver their economic impact of rising prices. By the end of 2022, nevertheless, JPMAM expects inflation will have normalised.
Addressing specific equity picks, portfolio manager Rajesh Tanna, as self-described “fundamental equity guy”, presented a number of specific opportunities that match JPMAM’s strategic view of focusing on US growth stocks, European multinationals, cyclical stocks, dividend growth and sustainability leaders.
‹Unprofitable tech will stay unprofitable’
Tanna is also behind the 2.5 billion euro JPMAM Global Growth Fund, offered as a Luxembourg-domiciled Sicav in various asset classes. This global large-cap mixed fund, 98 percent invested in equities, slightly outperformed the MSCI World Index in the first five months of this year and pretty much matched the MSCI over the last 12 months. The fund is down 5.3 percent year to date after gaining a stellar performance of 31.4 percent in 2021.
At the presentation of the mid-year outlook, Tanna addressed how the retrenchment in equity values has dragged the value of some quality stocks in a territory where they can be considered attractive, specifically those in the tech sector that are acting on the changing environment. “The landscape has changed. The industry has to react to the fact that the era of free money is gone,” he said. “Buy the disrupted.”
Addressing specific stocks, Tanna named Uber as a tech company that stands to benefit from its drive to become a free cash flow company this year, cutting costs as it recognizes what its CEO Dara Khosrowshahi has called “a seismic shift” in the market. Microsoft, already in the JPMAM Global Growth Fund, is the other tech stock that attracted Tanna’s enthusiasm because of a strong uptake for data centres, as well as a solid outlook for the coming years.
“It’s about buying the well positioned market leaders in the settlement. Not the unprofitable tech. Unprofitable tech will stay unprofitable, and will probably no longer be profitable, because it won’t be in operation,” Tanna said.
‘Buy the postcode’ at a discount in Europe
The portfolio manager questioned the general negative view towards European equities, noting that only 44 percent of their sales come from Europe. “Buying a stake in a European multinational is not the same as making a bet on the European economy,” he said. “So use that discount of being listed in Europe, buy the postcode to buy some of the best companies in the world.”
Tanna’s top European picks include luxury goods firm LVMH, car producer Volkswagen, electrical goods producer Schneider and Denmark’s health firm Novo Nordisk. Italian bank Unicredit is promising because its «balance sheet is so much stronger than we have seen,» he said.
In semiconductors, he preferred Texas Instruments, given its “segment exposure to automotive” electronics. An average car today has about 250 dollars of electronics, while electric vehicles hold about 1400 dollars worth of semiconductors. The new Tesla will have 2000 dollars worth of microchips.
“So the opportunity you see is four- to five-old in terms of growth, in terms of penetration,” said Tanna. “And so this is our key area in terms of overweighting TI, but also think about automotive and industrial semiconductors, less about the personal computing, less about mobile handsets where we do a peak cycle.”
Mobile banking in Africa
Where it concerns ESG, Tanna said investors should not forget to focus on the ‘social’ side. Companies offering opportunities in this area include Airtel Africa, which offers mobile banking services, India’s home finance company HDFC and US-based home builder Skyline Champion.
“So alongside the environmental opportunity, security, energy independence, when it comes to Europe, I think about real world problems requiring solutions, companies that are present there that provide you the growth opportunity, whilst providing the solutions,” Tanna said.
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