• ‘Golden era of innovation’ to drive equity investment
A“golden era of innovation” is coming and it could be good news for investors. Andy Budden, investment director at asset management firm Capital Group, believes that this era is about to unfold in the 2020s, driving significant equity investment opportunities.
“[This will be] a period when we think that innovative companies are really going to make the world a much, much better place to live, and actually a very exciting world to live in as well,” Budden says.
Speaking at Capital Group’s 2021 Asia mid-year investment outlook briefing on July 5, Budden presented some of the innovation-driven opportunities he expects to emerge across the next decade.
One sector he is especially bullish on is healthcare, which he says was already undergoing a period of innovation prior to Covid-19. Pointing to the early 2000s when the human genome was first sequenced, Budden says that since then, the development of testing capabilities and advancement of data science within the medical field has driven healthcare technology on multiple fronts.
The pandemic, a public health crisis like no other, will be the catalyst to accelerate healthcare innovation. For example, Covid-19 vaccines were developed at record speeds and so was the pace with which they have been produced for mass roll out.
Contrary to conventional drug or vaccine developments — which can take years or even decades of testing and clinical trials — scientists from around the world were able to cooperate across borders to produce the vaccines quickly thanks to sequencing technology, scalable manufacturing equipment and big data. “It really is a modern medical miracle, it’s one of the greatest scientific accomplishments in our lifetimes, in many ways,” Budden adds.
Although the vaccines were expedited by the urgent fight against the pandemic, Budden says it is a good illustration of the sort of gene-based therapies that healthcare and pharmaceutical companies are developing for many other illnesses. “And this is a big investment opportunity, if you have the research to understand the very complex issues that each company is navigating,” he adds.
How healthcare is delivered to patients is also being reviewed through the lens of the pandemic. Following the onset of Covid-19, Budden notes a surge in telemedicine has taken place as patients are unable to see doctors face-to-face or are reluctant to visit hospitals for fear of exposure to the virus.
Budden says that this surge in telemedicine, alongside developments in wearable technology, is happening across the board as part of a revolution to make healthcare cheaper and more accessible, thus enabling doctors to catch ailments earlier.
Closer to home, he also points to the distribution of oximeters, used to check the oxygen level in blood to detect early signs of a deterioration in health, to each Singapore household by Temasek Foundation as such an example of this shift.
Digital disruption
Covid-19 has also ramped up digital disruption. Despite the term becoming ubiquitous in recent years, Budden believes that the global economy is actually just on the cusp of true digital transformation. “[If] you think this digital disruption train is done, my message is, I think we’re only just getting started,” he adds.
The pandemic has played a huge role in accelerating the process, with companies bringing forward digital revamps up to years ahead of time as consumers were forced to rely on platforms such as e-commerce and cashless payments.
But the scramble to digitalise has accompanied a run-up in equity market valuations, especially for tech stocks. Budden believes that fundamentally, enormous growth potential still lies ahead.
Underpinning this belief is the fact that market penetration of digital platforms is still low in the grand scheme of things. He says that in the US, only 15% of total payments made last year were done through cashless methods. Meanwhile, e-commerce made up just 14% of total retail sales.
For entertainment, despite prominent platforms such as Netflix, only 26.5% of the US population’s TV viewing time is taken up by digital streaming services, with the bulk still spent on network and cable TV.
But Budden is upbeat on another revolution, this time in the automotive industry. Putting together the increasing reliance on digital platforms and the technological advancements for electric and autonomous vehicles, he believes that the entire car ownership experience will change over the next decade.
As such, he sees investment opportunities along the automotive value chain, including battery management, propulsion software, electronics and communications systems.
Budden anticipates sales of electric vehicles (EVs) to make up around a quarter of total car sales by 2030 and will surge from then on, in-line with timelines several governments have set to stop selling gasoline-powered cars.
The shift will be part of a larger overarching trend towards renewables as countries look to decarbonise. To that end, he also expects changes to take place within the energy sector, with “exciting” opportunities in renewable energy as it becomes a more cost-efficient alternative to hydrocarbons.
Value versus growth
After the fallout of the pandemic, when Covid-19 vaccines started rolling out, investors turned to economically-sensitive assets on expectations of recovery. This rotation to cyclical sectors, says Budden, has resulted in a rally in value stocks, which in turn has brought back the long-existing debate between value and growth investing.
Value stocks have historically outperformed growth stocks in the long run. However, since the Global Financial Crisis there has been a reverse, with growth stocks consistently surpassing value stocks.
Budden attributes this to digital disruption, which propelled an extended duration of growth, in addition to the low interest rate environment which also aided growth stocks. In contrast, value sectors such as energy, utilities and banks suffer from weak fundamentals, he argues.
Given the “golden era of innovation”, Budden believes long-duration growth is here to stay. But rather than thinking in terms of value versus growth, he views that the more important consideration for investors lies in a company’s fundamentals.
However, not every company in a high-growth sector will automatically do well. There are also companies within so-called value sectors that, although seemingly facing challenging market conditions, are actually highly innovative with the potential to deliver returns.
“What we want to be doing is not choosing value or growth, but instead, we want to be looking for high growth companies that are cheap, [and also] cheap companies that have high growth,” he says.
To that end, he remains a proponent of long-term investing, backed by bottom-up research and in-depth understanding of companies to seek out the hidden gems.
As part of this due diligence, Budden stresses that it is important to have all the facts, especially when it comes to assessing valuations in equity markets. Noting the current concern among investors on rich valuations, particularly within the US market, he cautions that it is crucial to look at the right data points.
Understand fundamentals
Budden specifically points to the use of P/E multiples based on historical earnings as having potential to mislead investors, given recent events. “If we look back over the last 12 months, earnings are actually quite depressed for obvious reasons. So the trailing 12 month price earnings multiple may be not so useful,” he explains. Instead, he recommends looking at forward earnings as a more relevant gauge.
Budden also reminds investors that given the current low interest rate environment, valuations for the equity market are naturally higher given that future earnings get discounted back at lower interest rates.
In any case, Budden stresses that although valuations are important, there are other pieces in the puzzle. He advocates investors to be discerning and understand a company’s fundamentals as well as its growth prospects, among other factors. “You should be very, very selective about what it is that you hold in a portfolio,” he adds.
Even though the low-interest rate environment has spurred some investors to shy away from fixed income assets as they hunt for yield, Capital Group is still positive on select fixed income opportunities.
“The important thing is really to look at fixed income in relation to your overall portfolio [and to] think about what function you want it to serve,” says Keiyo Hanamura, the firm’s fixed income investment director for Asia.
Think long-term
For investors looking to diversify, Hanamura prescribes having a long-term allocation to fixed income assets. “Unless you’re 100%, absolutely certain about the direction of the market, I think you’ll always want to have a fixed income allocation to smooth out your return profile,” he says.
Hanamura also points out that it is important for investors to look through short-term volatility. “If you start tactically moving fixed income allocation around depending on the market outlook, we’re effectively giving up this long term diversified diversification effect and instead, we’re engaging in market timing,” he explains.
Instead, Hanamura believes it is a question of time, and not timing. “We really think that the value of long-term investing is ultimately going to serve the investor as well,” he adds.
For investors looking for income generation, Hanamura says there are still opportunities in fixed income assets, despite low interest rates and tight credit spreads. Pointing to high yield and emerging market debt as areas with potential opportunities, he reminds investors to be selective about the assets they invest in and to ensure that they are in line with their preferred risk return profile.
As markets continue to recover from the pandemic, investors are likely ready to welcome a golden era ahead.