Investors who are parking their assets in money market funds in anticipation of a global recession are asking the “wrong question”, as opportunities abound due to the desynchronisation of the global economy, according to Andy Budden, investment specialist at Capital Group.
Budden said that while cash holdings among asset allocators are at their highest levels ever, due to concerns about interest rates and the potential for a recession, now was a good time for investors to reengage with the public markets.
He conceded that while for fixed income, the decision was relatively straightforward in favour of high-quality credit, in equities the situation was more nuanced and required an active management approach to navigate the choppy market conditions.
While much ink has been spilled over the desynchronisation of the global economy with China grappling with deflation at the same time as the West continues to see elevated levels of inflation, Budden pointed to the desynchronisation among industries as providing ample opportunities.
“That question of will there be a recession, won’t there be a recession, increasingly we’re thinking actually it’s the wrong question. And the reason for that is that Covid and the events in Ukraine as well effectively have blown apart the synchronisation of the global economy,” he said.
He pointed to the semiconductor industry as a good example. The industry is currently in the midst of a downturn with Taiwan Semiconductor Manufacturing Company, the world’s largest chipmaker, forecasting last month a 10% drop in revenues for the year.
The industry has been hurt by softening demand for automotive components coming on the back of fewer personal computer and smartphone sales.
However, the outlook for the industry has arguably never looked brighter as the growth of generative AI has sparked an increase in demand for high-end processors and in turn the chips behind them.
“I think the critical bit here is yes, there’s desynchronisation globally as well. China and emerging markets in general are more advanced through the cycle than some of the developed markets, for example. And Japan is always on its own path. But in this case, it’s about industries,” Budden said.
Overall, Capital Group takes a bottom-up approach to stock picking and is also a very patient investor, holding many of the stocks in their flagship funds for several decades, although this does not mean that Budden does not have some punchy views when it comes to different countries.
Regarding China, which has fallen out of fashion with a lot of investment managers lately due to its stuttering recovery post-reopening and recent problems in its beleaguered property sector, Budden is circumspect.
He agrees that valuations currently look attractive. According to Invesco, for example, China’s P/E ratio stands at 2.12 standard deviations below the MSCI China’s five-year, 12-month forward P/E average.
Although, he said that the smart move was to align investment decisions with long-term secular trends.
“There are these challenges but the way we think about investing is stock specific and long term and actually we do find some really exciting investments. They tend to be in companies that are really aligned with the strategic priorities of the Chinese government,” he said.
He cites batteries as one examples of a sector that is aligned with Chinese public policy. Here, China has managed to corner the market globally for batteries thanks to a strong domestic EV market, accounting for around one third of all vehicle sales.
Although, there some concerns about the future for their producers led by CATL globally as the Inflation Reduction Act in the US offers subsidies for companies developing their own batteries absent of China’s input.
Regarding Japan, which has proved to be popular with asset allocators this year, Budden is bullish about the prospects for the country. He points to the fact that the Tokyo Stock Exchange has introduced a soft requirement for listed companies to achieve a price-to-book ratio of at least 1x, although he notes that improved corporate governance is a multi-year phenomenon.
Like a lot of other sophisticated investors, he is particularly enthusiastic about the opportunities in the small- and mid-cap space, which have not re-rated as dramatically this year as the large-cap stocks that have benefited from strong foreign investor inflows.
“We tend not to focus so much on the big, large caps, the well-known companies. Our focus tends to be more on the mid-cap type companies, where they’ve managed to be really creative and innovative and almost get a stranglehold on a particular element of the global supply chain. Those in our opinion are some of the most intriguing and exciting Japanese companies,” he said.
