As 2019 approached investors should be cautious on markets, rigorously bottom-up when considering valuations and focused on the longevity of growth opportunities, according to one City asset manager.
Zak Smerczak, portfolio manager and analyst at independent asset management group Comgest, told clients in an investment note that his stance is one of caution but there are many robust business models capable of delivering visible, stable and sustainable earnings growth for long-term investors in most economic environments, irrespective of location or industry.
"One area in which we have recently found new ideas, or reinforced existing ones, is US and European consumer staples, which became unloved as fears of inflation, raw material price pressure, and channel disruption came to the fore. Both Church & Dwight and Unilever (are just such stocks. We believe that both offer consistent, visible, high single-digit, top-line growth with improving margins from cost optimisation and operational leverage as they scale into new markets, helping them deliver low but consistent double-digit bottom line earnings growth."
Similarly, Smerczak believes leading medical device suppliers like Medtronic and Becton Dickinson offer consistent and very visible high-growth opportunities driven by innovative product launches, emerging market penetration, and competitive pricing (albeit with pockets of pressure through some healthcare reforms).
"We have continued to reinforce our investments in these businesses through the year taking advantage of very favourable valuations."
Looking at country-specific opportunities in 2019, Smerczak says Japan continues to offer new ideas in what is a very low-covered market where consensus forecasts, in his experience, generally underestimate the growth potential."
Retailers such as Fast Retailing (owner of the Uniqlo brand), Seven & I and Don Quijote are all benefiting from stable improvements in store sales growth, new store rollouts, and margin expansion. In addition, all are benefiting from continued growth of inbound tourism, particularly from China, which in Fast Retailing’s case is also a country in which they are building stores and growing strongly.
“No matter what happens on the macro side, we believe it’s possible to find visible, stable and compounding growth investments at attractive valuations to hunt in the New Year.”
