Tectonic economic shifts favour active investing in volatile times

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The global macro-economic picture remains dominated by two tectonic shifts and investors should be aware of the ongoing impact of these to identify the best long-term opportunities, says Hamish Tadgell, portfolio manager at SG Hiscock & Company for the SGH20 Fund.

“We are in the middle of a major change in the economic and technological environments which will have – and indeed are already having – a significant impact on financial markets and investors.

“Firstly, extreme monetary policy and impacts of excess liquidity continues to play out in most developed world economies.  Secondly, we are in the middle of a technology and communications revolution that has fundamental social implications.”

Mr Tadgell says these issues are driving seismic changes in economies and markets around the world.

“In the first place, excess liquidity has created a massive distortion in financial versus real economy prices, such as wage growth.

“Following on from this, the distortion is sharpening the sting of inequality.  We believe we are in a new phase of what we call the “war on inequality”, which is characterised by rising popularism, regulation and redistribution.

“Thirdly, we are experiencing the rise of China and a change in world order.  The global financial crisis has aided China’s emergence as an economic superpower and it is now entering the next phase of its industrial modernisation under its ‘Made in China 2025’ policy to upgrade its economy.

“In our view, the current trade tensions reflect a broader structural and more permanent change, akin to the US-Sino relations in the 1970-80s when Japan emerged as an economic super power.

“Against these seismic trends, central banks are now on an exit path from quantitative easing, adding to the risk of higher rates and volatility.  This requires a heightened level of diligence around valuation and regulatory changes and  favours active management and a fundamental investment process.

“In our view, taking a high conviction active approach to investing in companies well positioned in attractive end markets, and that have engaged and focused leadership, is vital.

“For example, we look to identify attractive industry themes and dynamics that provide ‘tailwinds’, and seek companies well positioned to benefit.

“Tracking themes and their investment implications is important as they realign profit pools, recut winners and losers and create new segments of growth.  Ultimately, they are borne out in the performance of individual stocks.

“For example, some of the current themes we are currently focused on include the “war on pollution” in China; the domestic infrastructure boom; the battery revolution; and Fintech disruption.

“Of course, the fact a company is leveraged to a thematic tailwind doesn’t automatically translate into it being an investible idea.

“Ultimately we are fundamental investors and it must stack up under our ‘bottom-up’ fundamental research and portfolio construction process,” Mr Tadgell said.

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