Investors must look through inflation to focus on bigger picture themes such as growth scarcity in global equities


Tim Richardson

While US inflation concerns and breakout stocks such as Nvidia are currently hogging the limelight in global equity markets, broader growth opportunities are currently scarce and could have more influence on markets.

Tim Richardson, global equities Investment Specialist at Pengana Capital Group, says the current bifurcation in global equities provides selective opportunities for astute active managers. “The six S&P 500 stocks which delivered the fastest earnings growth in 2023 accounted for over 130 per cent of the earnings growth of the market, while many stocks in the index saw earnings fall back.

“This is a classic stock picker’s environment with winners and losers defined by their alignment to long-term growth themes. The AI theme is one such example. Nvidia is riding a wave of insatiable demand for the computing power required to train the large language models which support AI applications.

“But we expect to see a broadening of interest along the AI value chain, as businesses which aren’t specifically AI companies, but use AI tools to improve their services, deliver sustainable earnings growth.

“There will be major opportunities via these companies and the key is to identify them before the earnings growth becomes priced into market valuations.”

Mr Richardson said the Pengana Axiom International Ethical Funds had benefitted from exposure to Nvidia, with the fund delivering a 43.7% net return to investors over the year to 29 February 2024.

But he said Nvidia is only part of the story, with strong returns from several holdings which demonstrate ‘dynamic growth’. “In an environment where growth is scarce, targeting companies which are changing for the better is an important source of alpha.

“There is opportunity in companies that are either restructuring or developing new products or services, which may also be linked with secular growth trends such as deglobalisation and disruptive innovation.”

For example, Mr Richardson said understanding consumer trends had proved to be fertile ground for identifying dynamic growth stocks. “While consumers have been under pressure in aggregate, there are pockets of consumer spending which are performing well.

“For example, discount stores appealing to those who still have money to spend, such as Costco, affordable luxuries such as e.l.f. Beauty and high-end luxury which is insensitive to rising living costs, such as Hermes and Ferrari.”

He said Axiom had also been early to identify the shift to buying services over products, “The growth in buying services has been good for companies such as Visa, Starbucks and live entertainment group Live Nation. It even includes increased spending on pets, boosting stocks such as IDEXX Laboratories.”

Quantum change had also been evident in the pharmaceutical sector. “The successful development of treatments for obesity has brought rapid earnings growth for a very small set of companies.”

The scarcity of earnings growth is set to be a defining aspect of share markets for the foreseeable future, according to Axiom. “Markets are being influenced by four major big picture trends: debt levels, deglobalisation, demographics, and  disruptive innovation – each of these is providing opportunity for stock pickers who can identify companies poised to benefit.”

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