In a global environment of high and rising interest rates, coupled with a large-scale conflict playing out in Europe, it’s hard to envy those trying to pick the winners in the tumultuous financial markets.
But fund managers need to find good investments in both good and volatile markets.
We asked three fund managers for their outlook on the New Zealand and Australian markets over the next two years.
They say there are industries strong enough to weather global volatility and companies lurking on the NZX that may be diamonds in the rough.
Victoria Harris – Devon Bottoms
Devon Funds portfolio manager Victoria Harris says the past decade has been a relatively easy time to be a fund manager, because markets have generally trended higher. But all that has changed.
“Now it’s really a stock-picking market, with super-high inflation putting an end to the easy-money environment. We are going to see a trend of funds towards cheaper companies with growth prospects and value names,” says Harris.
Harris prefers the Australian market to NZX over the next 12 months, due to strong Australian commodity and energy sectors and less aggressive rate hikes from the Reserve Bank of Australia.
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But not all industries are safe in Australian markets. Those sectors that rely on consumer spending can suffer as household wallets tighten, he says.
“Retailers exposed to housing may struggle for years to come. Places like Bunnings, Harvey Norman and building supply companies may suffer next year. Those companies with high debt will also see their profits affected.”
Therefore, Harris is looking at companies with pricing power and the ability to pass on rising costs to consumers, such as supermarkets, energy and infrastructure, as better investment opportunities for the near future.
Hamesh Sharma – Conqueror
Pathfinder portfolio manager Hamesh Sharma says he is looking to invest in the financial and banking sector of the Australian market.
“As interest rates rise, bank spreads rise… we think the Reserve Bank of Australia will follow New Zealand in this regard, so we want to make sure we are exposed to this part of the market,” he says. Sharma.
Sharma says he is keeping a close eye on National Australian Bank, BNZ’s parent company, and insurance provider QBE.
“We have seen that insurance providers have made more money in recent years and we believe that this is a trend that will continue. Barring a few events like the Australian bushfires, we think insurance providers like QBE have capital ready to really grow over the next year or so.”
Like Harris, Sharma says the retail sector will have tough years ahead as consumer spending tightens.
But he made the exception of Woolworths, whose ability to pass on additional costs to consumers was a good hedge in a portfolio.
In the local market, Sharma says he is looking for companies focused on renewable energy such as gentailers Meridian and Contact, as well as more specialized companies such as Infratil and solar panel manufacturers.
“In recent years the cost of building solar energy projects has dropped by 10%. As we see an acceleration of renewable energy, solar power is an area to watch.”
David Fyfe, Mint Asset Management
Mint Asset Management portfolio manager David Fyfe says that as we see a large outflow of cheap money, he is looking at sectors that can handle volatility, such as defensive growth stocks.
“These are companies that have high revenues with a strong retail base. Familiar names that do the job of being a defensive holding company while continuing to grow,” said Fyfe.
Companies in this space include Contact Energy, which serves an existing customer base and is actively preparing for the growth of renewable energy, he says.
But a trend toward defensive growth did not mean there was no room for thematic investment, especially if the theme involved green recovery in response to climate change, he said.
“Despite market volatility, the push toward renewables is not going to go away. That is why we believe that there are still good investments in Infratil and Trustpower at the local level. But this is a long-term investment, as there is a long way to go for renewables.”
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Victoria Harris, Devon Funds:
EBOS Health: New Zealand’s largest provider of medical consumables, equipment, solutions and supplies for the healthcare market.
“We believe this is a great company that has had a few good years and is poised for further growth. We believe that, despite some volatility in its sector, it will continue to perform well for years to come.”
Hamesh Sharma, Conqueror:
push pay: Saas company that manages donations for charities operating within the United States.
“The valuation of technology stocks has collapsed as investors adjust future earnings for inflation. We continue to believe that Pushpay is a solid investment in the medium term. It’s not so much of a bargain, but it’s cheap compared to other tech companies of its size and revenue.”
David Fyfe, Mint Asset Management:
Serko: SaaS company that provides technology to help businesses manage travel and expenses.
“This local business travel management software just signed a great deal with Booking.com, we see it as a great endorsement of what the company is doing. It comes with a certain amount of risk as it’s connected to international travel, but we think this certainly has potential.”