Ned Bell
Global equities boutique manager Bell Asset Management believes expectations of higher inflation and interest rates will drive the world’s equity markets in 2022 and favour smaller, quality companies with the ability to raise prices without affecting demand.
At a recent virtual event, Ned Bell, Chief Investment Officer, Bell Asset Management (BAM), said the stock market was currently transitioning from a focus on big growth stocks, like technology companies, to smaller firms in sectors like health care and consumer goods.
“There is definitely a change happening. Clearly, we’ve seen a lot of valuation risk materialise at the top end of the market, however we’re seeing good valuations in the global small to mid-cap (SMID) area,” said Mr Bell.
Global SMID cap companies currently have a price/earnings ratio of 16.8 times, which is a 40% discount to large cap growth companies, Mr Bell said.
“The earnings recovery still has a long way to play out in the SMID arena, with SMID EPS growth in 2022 estimated to be 21% compared to 12% for the MSCI World index.
“Global small and mid-cap equities could arguably appreciate by around 33% over the next 12 months,” he said.
Quality key
“We really do feel like this is the environment when high quality companies with pricing power are going to do really well. With inflation spiking and interest rates rising, that’s a double whammy for companies that don’t have pricing power,” Mr Bell said.
He added that, when looking out to the second half of 2022, he expected inflation rate growth would begin to ease, reducing pressure on the central banks to raise interest rates and allowing developed economies to gain economic momentum.
“From our perspective, the magnitude of inflation will come off but it’s not going to disappear,” Mr Bell said.
He said this outlook worked well with BAM’s focus as an investment house that aims to buy quality companies at a reasonable price.
“We believe “quality” will shine in an environment where inflation is rising, interest rates tick higher, stimulus dissipates and global economic growth decelerates,” Mr Bell said.
Portfolio changes
Mr Bell said the volatility which had hit markets at the start of 2022 had also meant that, for the first time in two to three years, there have been many companies which have been oversold, presenting some excellent buying opportunities. BAM has been able to rebuild holdings in companies it had always liked but had previously sold because they had become overvalued.
As a result, BAM had re-established positions in Japanese high-tech and medical products company Hoya, global medical technology company Masimo and coffee chain Starbucks.
“We’ve sold all of these companies sometime in the last two or three years for valuation reasons,” he said. BAM had bought back into these companies because the share prices of the firms had fallen an average of 36% in the recent market sell-off.
In terms of the regional allocations, Mr Bell said the fund manager is now overweight Europe, and had been cutting its position in North America. “We feel Europe is the right place to be,” Mr Bell said.
Funds outperform
Looking at the performance of BAM’s funds, the Bell Global Emerging Companies fund was up 29.8% for the year to December 2021 outperforming the the MSCI World SMID Cap index which rose 23.9%.
The Bell Global Equities Fund (Platform Class) was up 32.5% in the year to December 2021, outperforming the benchmark MSCI World ex Australia Index which returned 29.6% for the period.
Mr Bell said these funds moved in line with the markets in January when markets were very volatile but were both performing in line with expectations.
