Jamie Nicol
As inflation starts to ease there are two disruptive themes emerging in the current environment, says DNR Capital, a leading Australian equities investment manager.
Jamie Nicol, chief investment officer at DNR Capital says: “The first is looking at productivity benefits from AI and technology and an aging population, versus the ongoing spend that’s needed to transition to a zero carbon future. The market is trying to figure out this balance and decide on a clear direction on this issue.
“The other debate is around hard landing versus soft landing. Clearly interest rates are on the way up and ordinarily we would expect the economy to slow in response to that. We have seen some evidence of slowing but the economy has been resilient to date. And that remains a key area of debate.
“What this means from a market and opportunities perspective is that after a very long period of uncertainty the outcome of these debates is not clear.
“What we are seeing in terms of opportunities is that uncertainty is driving some good quality companies to trade at discounts.
“This environment has provided a rare opportunity to invest in good quality businesses that perhaps are getting disrupted through hiccup in earnings, change in CEO, or a range of events which are causing some of these better quality companies to trade at discounts,” says Nicol.
Nicol cites SEEK and CSL as examples.
He says “SEEK is a great business and market leader across Australia, with its earnings tied to the economy due to job numbers. This uncertainty means investors are gravitating away from this company. This creates an opportunity for us as its stock price has become reasonable.
“We believe SEEK has a long-term opportunity to continue to lift prices and continue to expand into new markets. We think that will drive very good EPS growth on a through-the-cycle view.
“Another example of a more defensive but also disruptive stock is CSL. Obviously CSL is a market leader but it is trading at a reasonably weak level. They’ve had a change of the CEO. They did have a downgrade to near term earnings which was all about the recovery and earnings post-COVID, and perhaps the recovery is taking a little bit longer than what they initially expected. But the longer term trajectory still looks very good.
“We always like to buy in periods of uncertainty, particularly when we are unclear on what the macro framework looks like. We look for quality characteristics, good management, good businesses, good industry structure, competitive advantages, good ability to earn strong margins over the longer term because the market tends to gravitate back to those companies over time.
“And right now, investors can pick up some of those businesses at really good discounts,” notes Nicol.