It is times like these when investors are tempted to reposition portfolios quickly.

The outbreak of the conflict between the US-Israel and Iran has sparked further market volatility and ‘risk-off’ sentiment but reacting too quickly to geopolitical shocks can be counterproductive, according to Andrew Dale, partner at ECP Asset Management.

“Markets and investors alike despise uncertainty, which destabilises the market. However, there is no crystal-ball for investors to show the implications of this conflict over the long-term.

“It is times like these when investors are tempted to reposition portfolios quickly, sparking knee-jerk reactions and sell-offs. However, markets require time to process the ‘new information’.

“Long-term investors should remain disciplined and focused on sticking by their investment process and philosophy, rather than making rash decisions and rushing to investing now in energy companies because of the rising oil price,” he says.

Uncertainty in the market has been a feature for the past 12 months, which Dale says triggered the rotation out of growth stocks and into value, particularly for software-related companies coming under a lot of pressure from artificial intelligence (AI).

“This past year, investors have been questioning the valuation of many growth companies.

“During the first part of reporting season tech-heavy names were down 30 to 50 per cent, while higher quality growth names were down around 20 per cent. But by the second half of reporting season, we saw companies starting to deliver a reasonable result, providing a constructive outlook to re-enter some of those high-quality growth stories,” he says.

Dale says investors should lean toward defensible growth such as healthcare and industrials, as well as banks.

Within healthcare, Dale points out sleep-apnoea device manufacturer ResMed which has a defensible earnings stream. In banking, he says traditional banking stocks such as CBA are a good safe haven for investors.

“When economies are booming, investors look elsewhere but when there is a slowdown, banks tend to be a relatively good safe haven for investors.  This is especially true for the Australian market, where we are experiencing sticky inflation and a rate hiking trajectory.

“Companies like CBA will continue to provide a defensible position, but investors should not expect these companies to go up in double digits,” says Dale.

Other safe havens during market volatility include resources. Dale says investors should focus on the diversified play in resources.

“I think that once the market gets through this dislocation in the Middle East, companies like Rio and BHP will be the best way to play the resource rally,” says Dale.

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“A number of companies with a high proportion of their sales offshore will have entered reporting season forecasting revenue on the basis of the Australian dollar sitting at 65 to 67 US cents. With the dollar now above 70 US cents, this immediately translates to a 5 to 7 per cent downgrade.

“Going into reporting season, the general consensus was that there would be around 8 to 10 per cent growth in earnings across the board. But if you take resources companies out of the equation, which have performed well recently and have been bolstering those expectations, then the focus is on tech, industrials, healthcare and consumer focused companies. And these companies tend to be very vulnerable to currency movements because many of them are earning money offshore and translating back into Australian dollars. So it is likely that we will see some weakness coming through,” he says.

The first week of reporting season has already seen a high level of volatility in the market, further exacerbated by overseas markets which tend to drive sentiment in Australia. Dale says the volatility is unsurprising in light of the high price-to-earnings tech stocks and market commentary around the validity of AI in the technology sector, which has dominated markets globally.

“AI may not be totally transforming of every business, but it is certainly here to stay and will have a positive impact on productivity. If used correctly, AI will help to drive and grow earnings in the long term.

“But we’re still at the infancy stage with companies still focussed on how to leverage AI into improving productivity, and how to grow their overall earnings in their markets. That’s where the story is going to be,” said Dale.

Dale says Australian listed tech companies like WiseTech and Xero are expected to release reasonable results this season, despite a sell-off of these companies by those who think AI will reduce their total market share and opportunity.

“Companies like WiseTech and Xero have incredibly strong customer bases and they are operating in complex market; their solutions aren’t going to be replaced by AI. We believe there is a lot more room for growth for these companies, and the focus this reporting season will be on their ability to price, as well as their pricing power. Further weakness in the short term is possible, but their long-term growth story still holds.”

The healthcare sector is another area where Dale says investors should look for long term growth opportunities.

“The healthcare space has underperformed quite materially in recent months, but there are some great quality companies that still have good sales growth and earnings growth. For example ResMed and Cochlear both have very strong revenue growth, and the financials have come back into play,” he says.

In the resources sector, Dale says that those who haven’t yet invested in these companies have likely missed most of the upside.

“There is a lot of appetite amongst investors to get exposure to hard assets like lithium, iron ore and gold. The outlook for these resources remains strong, however for investors who are currently underweight in resources and are looking at investing to gain, the ship has probably already sailed, as the price for these resources is on the higher end,” he says.

Faced with another volatile reporting period, Dale says this could be the norm going forward.

“It has become somewhat of a common trend that reporting season is a period of high volatility. This shouldn’t be a surprise to investors, and should be expected going forward.

“Long-term investors should look beyond the short-term market noise and understand the fundamentals and competitive advantages of the companies they are invested in, and look for quality companies that can evolve and grow with the market,” says Dale.

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“Demand for healthcare is not driven by macroeconomic events or trends but rather actual need. As such, the healthcare sector is largely immune to what is happening in the global macroeconomic landscape.

“Having said this, investors do need to take into consideration the changing funding environment, particularly in the US where a microscope is being applied to all healthcare spending. Probably the area that has been the most complex in this regard has been the hospital sector which has had to deal with all sorts of cost increases,” he says.

Looking more locally, Dale says the healthcare sector in Australia is diverse, and there is no one theme that is driving all stocks.

“In Australia, the aging population and the demand for healthcare services is increasing, and provided a company can manage its costs base and has minimal regulatory influencers, it will be well-positioned to grow earnings.

“With aging populations comes an increase in life-deteriorating diseases such as diabetes, sleep related illnesses, hearing related problems and just more generally overall health. These will help to drive growth of stocks like ResMed (ASX: RMD), Cochlear (ASX: COH), Fisher & Paykel (ASX: FPH) and CSL (ASX: CSL),” says Mr Dale.

ECP’s preference for the sector remains focused on speciality device and product companies.

“The growth rates of speciality device and products companies has been very consistent over the past 10 years (taking COVID into account) and we would expect growth rates to continue well into the next decade. These companies also have very strong market positions and are dominant in the space they operate in.

“For example ResMed has 80 to 90 per cent market share of sleep devices while Cochlear has around 60 to 70 per cent market share of cochlear implants. This sustainable competitive advantage puts these companies in a very good position, and they are very defensible in times of economic uncertainty.

“These device companies with high market shares are very different to some other healthcare related names where costs can be harder to manage in these sorts of inflationary times,” he says.

ResMed has consistently outperformed, which Mr Dale says is due to a number of reasons, including its focus on R&D and the creation of new products in the sleep space.

“ResMed has been a market leader for many years in the product that it makes. Aside from its R&D focus, it also benefited from Philips, the second largest competitor in this space, recalling two of its products. This led to ResMed growing its market share to around 80 to 90 per cent over a 12 months period, with its ability to affordability supply the market in a timely manner now the issue.

“The stock also suffered around 18 months ago from the hysteria generated by the increased usage of GLP1s. These drugs were set to revolutionise the obesity market and solve all sleeping related problems and obstructive sleep apnoea (OSA) problems. However, this was not the case and while GLP1s, when used correctly and consistently, have a very positive impact on weight loss, they take time to come into effect and are costly.

“Studies revealed that GLP1s can reduce the occurrence or severity of OSA, but combined therapy of GLP1s and CPAP usage was the best standard of care for OSA patients. This led to a large increase in demand and has really opened up the diagnosis funnel and will continue to drive good sales and earnings growth for the company over the next few years,” says Mr Dale.

Although some stocks have not performed to investor’s expectations, like CSL, Mr Dale says that the company’s fundamentals and strong R&D plans will support future growth.

“CSL had underperformed as investors had been disappointed with the pace of progress in its Behring business, and a narrative that has been distracted by its acquisition of Vifor and vaccine uncertainty in the US. There was also a global loss of appetite for healthcare companies post COVID in a “risk-on” world. But, as we’ve seen this year, things can change very quickly.

“We remain optimistic on CSL’s long term future. Its margin recovery is underway, and the company has a number of product launches coming, including Hemgenix, a gene therapy for haemophilia, and Garadacimab, a treatment for hereditary angioedema, that should support growth.

“At 25 times FY25 earnings, for low double-digit earnings growth over the next 5 years and improving returns on capital due to lower capex, CSL is a defensive company that looks very attractive,” says Mr Dale.

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Chairman and CEO Dr Manny Pohl, said the investments within client’s portfolios were performing strongly and that this was leading to increasing demand.

“We launched our funds management business less than 12 months ago.  Our flagship strategy, the ECP AM EX50 strategy, is performing extremely well and our funds under management has been rising steadily.  We are very pleased to now welcome Andrew to our team and look forward to the contribution he will bring.  The opening of this new office in Sydney is also an important step, as it will allow us to more closely work with our institutional clients in Sydney and Melbourne.”

The ECP AM EX50 strategy has returned 24.8% since inception, against its absolute benchmark return of 5.3%, whilst the S&P/ASX Small Ordinaries Accumulation Index has seen a modestreturn of 5.4%.

Andrew Dale has 17 years experience in financial services.  His most recent position was Managing Director, Global Natural Resources with Macquarie Bank.  He has also held analyst positions with ABN Amro and Yahoo, as well as a role with KPMG.  Mr Dale has a Bachelor in Accounting and Finance from the University of NSW.

Dr Pohl said the business had further growth plans and additional announcements will be made in this regard in the near future.

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