Different investment approaches from two asset managers were to the fore in a conference discussion about the state of the economy and markets last week.

Despite sharp strategic differences in their approach to investing, two prominent asset managers at the Morningstar Investment Conference agreed that the stock market’s steep decline offered promising opportunities for patient investors.

“Risk is lower now than it was a year ago,” said Sarah Ketterer, CEO of value-oriented Causeway Capital Management, speaking at Morningstar’s “Where in the World are Equity Opportunities” session. “From a market perspective, some of the air has come out of the bubble, although there may be more to go – and it’s hard to know how much more. From an investment perspective, we’re much calmer now.”

Growth-oriented manager Sammy Simnegar, a portfolio manager for Fidelity Investment’s equity division, also believed that investors should look past the market’s current downdraft. The unusually tumultuous events of the last two years, including a pandemic, a European war and severe supply chain disruption, have been a compressed version of the previous century’s travails, Simnegar argued.

“This too shall pass,” he said. “Things will normalize, inflation will come back down. In my opinion, once the economy normalizes in 2023, the rest of the decade will look very similar to the decade between 2010 and 2020.”

Wealth managers are wrestling with a mass of macroeconomic, geopolitical and post-pandemic forces in judging how to position clients’ portfolios. (Click here to see a previous report from the Morningstar conference.)

Growth vs value
The differing investment philosophies of the two asset managers surfaced, however, when they discussed specific market opportunities.

Causeway was adding financials to its portfolio because banks were not dependent on the supply chain and a number of European banks were undervalued, Ketterer said. “There are institutions the market just doesn’t understand” that asset managers can exploit, she added.

Simnegar said he avoids banks because he views them as a “commodity business” that didn’t command brand loyalty and, like retailers, had volatile gross margins “and not a lot of pricing power.” 

“I’m not interested in companies that are dependent on [external factors] like interest rates and who is president,” he explained.

By contrast, luxury companies like LVMH do have brand loyalty and can charge premium prices, Simnegar said. His funds, which include Fidelity’s International Capital Appreciation Fund, look for companies with compounding earnings' growth that are reasonably priced and have “their destinies in their own hands.”

Another criterion: companies that are “near a solution toward providing automation. We want to be more invested in R&D and tech-oriented and future-facing businesses that are re-establishing supply chains.”

Value managers are currently looking at stocks “with some level of skepticism,” Ketterer said, targeting stocks with low multiples “that are sufficiently undervalued to create a margin of safety.”

As value investors, Causeway discounts cash flows of a business to the present using a discount rate “we think incorporates the tightening cycle we’re in.”

Cyclical stocks are a priority if the economy falls into a recession, she added. “Industrials, materials and financials will come roaring back and we think it is absolutely essential to be positioned for that.”
 

Global outlook
Investors will need to navigate international equities very carefully, the asset managers said.

The Russian invasion of Ukraine will put great stress on the European economy and result in rationing by next winter, Ketterer said. But there were silver linings for investors, she argued.

Companies that had even minimal exposure to Russia were sold off, creating a buying opportunity at lower prices “for some great companies,” according to Ketterer. Another opening for investors, she maintained, will be Europe’s need for renewable energy and an upgrade of its defense system.

While Simnegar was dismissive of Russia, calling the country “more of a banana republic with nukes and oil” that “was not that important globally,” he said the invasion of Ukraine has greatly damaged the global economy. As a result, any chance of a soft landing for investors already experiencing difficulties “have come down dramatically,” Simnegar said.

In the long term, Simnegar said he was “very bearish” on emerging markets but “very bullish” on developing markets, citing “more job creation” in the latter.

Uncertainty in China
When it came to China, both managers agreed that the degree of government involvement in private businesses will be critical for investors.

“Chinese companies are under enormous pressure to do what the government says,” according to Simnegar. “And wherever government gets too involved, I tend to run the other way.”

He urged investors to see if the Chinese Communist party politburo puts the current premier, Li Keqiang, in a position this fall to act a pro-market counterpoint to the increasingly authoritarian president Xi Jinping. “That may be a signal” that the party is easing off its current hands-on policy toward private firms, Simnegar said.

The trajectory of return on capital in China is coming down, Ketterer noted. “The equity risk premium has to deliver more returns,” she said. While equity opportunities can be found, investors “have to be cognitive about the direction the county is going,” she cautioned.