Picking winners and losers in a volatile world
The IMF’s World Economic Outlook projects that global growth will slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023.
The global geopolitical risk landscape remains volatile and fluid, affecting developed and emerging regions differently, while regional inflation and the response from central banks differ. In addition, sectorspecific shocks such as the banking crisis in the US and lingering supply chain constraints pose additional threats.
These market dynamics make picking regional and sector-specific winners and losers a fraught affair for asset managers looking to protect investor capital while delivering a return on investment.
“Within an increasingly interconnected world, areas of differentiation between sectors and regions pose threats and opportunities,” says Glenn Silverman, Investment Strategist and Director at RisCura.
“Asset managers can make many countervailing arguments because winners will emerge from the worst regions and sectors while losers will emerge from the best, which ultimately makes investing challenging and exciting.”
Philip Saunders, Investment Institute Director at Ninety One, argues that the winners of the new cycle will unlikely be those of the last, both regionally and sectorally.
“The collapse of Silicon Valley Bank (SVB) heightened investor fears of a re-run of the global financial crisis, where weaknesses in the financial system triggered a recession and pronounced weaknesses in equities and other ‘risk assets’.”
While time will tell whether SVB is an equivalent trigger, Saunders highlights that the run on smaller US banks will tighten credit conditions further down the track.
“Despite the risk, the Fed continues to prioritise fighting inflation over maintaining financial stability by continuing to raise rates.”
While the process of normalisation may result in a painful recession, Saunders suggests it is a price worth paying.
“A new ‘new normal’, with positive as opposed to negative real interest rates, would impose the capital allocation discipline that was missing in the post-GFC period, and rewarded the kind of business models that SVB and FTX exemplified.”
Faced with numerous challenges, including the war in Ukraine, the China-US standoff, stubborn inflation and high government debt levels, among others, Saunders suggests that investors recognise where value has been restored, and consider what the next cycle will look like.
While Silverman typically recommends a bottom-up, stock-picking approach, if investors insist on taking a topdown, thematic perspective, he believes it is critical to take cognisance of valuations.
“Consider emerging markets, particularly those in South-East Asia, as well as China and India, even though the latter is not cheap, and Brazil. From a sectoral perspective, focus on quality companies in defensive sectors such as food and consumer staples, which tend to outperform in economic recessions.”
Saunders affirms that many emerging economies are in good shape, adding that Saudi Arabia acted boldly to transform its economy while agreeing to a truce with their Iranian neighbours.
“Sector calls are far more challenging,” says Silverman. “The US tech sector remains expensive, yet many investors favour it, while US regional banks along with the US property sector face significant headwinds, but may offer reasonable value.”