Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Scott Berg, portfolio manager of the T. Rowe Price Global Growth Equity Fund, explains why investors should be looking to unloved assets.
The uneven nature of global economic health and an environment where the US Federal Reserve has begun to tighten monetary policy has no doubt raised understandable questions in investor minds. Is the equity cycle coming to an end or merely entering a new phase?
Our belief remains that improving corporate earnings fundamentals over the next 12 to 24 months will help the stronger companies steer through the uncertainty and that the equity cycle has enough improvement factors ahead for us to believe that it can continue to deliver positive returns for investors.
However, we are in a world of dispersed corporate prospects, and shifting sentiment is already providing opportunity as individual stock prices begin to react more aggressively to earnings outcomes and, especially, earnings disappointment. We believe a contrarian stance, backed by a clear understanding of companies’ long-term fundamental prospects, will provide a strong foundation to withstand as well as profit from a world of rising volatility.
Look to US Financials and Emerging Markets
The increase in market volatility has created numerous areas of opportunity for fundamental, bottom-up investors. US financials and some parts of emerging markets are two segments of the global equity opportunity set that have underperformed, but where we can find stocks positioned to benefit from the next stage of the equity cycle. The key to the thesis is we expect our holdings in these areas to deliver improving earnings growth, from low-base levels of profitability and/or sentiment.
One of our highest convictions is in J.P. Morgan Chase. In addition to benefiting in the near term from rising rates and increased M&A, the firm has above-average balance sheet strength and diversified business lines that are highly levered to US consumers, which should also support earnings power as the economy continues to improve. Furthermore, we believe the regulatory environment is beginning to normalise and will be much less of a headwind going forward.
The turmoil in emerging markets is also beginning to create real opportunity as we see signs of improvement in 2016. For some time now, we have highlighted that the ‘EM’ thesis has to be reconsidered at a more granular level given that the emerging world has become so fundamentally dispersed. The lack of consensus about this fact means we are seeing opportunities to add to our positions in Asia, including holdings in the Philippines, Indonesia, and India.
As always, selectivity is key, however, and in our view, should begin with a constant and vigilant approach to understanding the fundamentals of each company you own. A clear understanding of which stocks are best positioned for the next leg of a recovery in cash flow and profitability terms is key at this point in the cycle.
Our approach is to always seek to add to growing businesses at contrarian or controversial entry points, given this remains one of the timeless approaches to investing and can ultimately assist in the delivery of outsized gains.
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