FINANCE - FUNDS

Interview

Risks and opportunities with every market move



Julie Dickson, equity and multi-asset investment director at Capital Group, noted that when a new market cycle occurs, an asset manager's job is not to announce future themes, but to identify new winners. Photo: Micha  Micha Theiner

Julie Dickson, equity and multi-asset investment director at Capital Group, noted that when a new market cycle occurs, an asset manager's job is not to announce future themes, but to identify new winners. Photo: Micha  Micha Theiner

Many equity investors are focused on the likelihood of a future recession. Aware of the challenges, Julie Dickson, equity and multi-asset investment director, outlines the reasons for maintaining a long-term view while identifying new opportunities.

Benoît Theunissen: The equity markets are entering a bear market phase. How is this phenomenon currently playing out?

Julie Dickson: Some of the correction we've seen this year really started last year. Since 2008 and particularly during the health restrictions, high-growth companies have done exceptionally well, fuelled by an incredibly low and sustainable interest rate environment, where capital was cheap. As a result, borrowing and investing in growth was very accessible for many businesses. Demand for digital and online platforms has exploded, growing dramatically, particularly in the last two years. At the end of last year, we saw a rotation of this phenomenon, materialised by concerns about some of these stocks. Then, as investors, we were concerned about the arrival of inflation as a result of the pandemic, the arrival of a potential rise in interest rates and the strong value of the dollar. De facto, we naturally expected that stocks would start to turn around at some point, as they usually do when they reach a psychological ceiling in valuation. At that point, we then have to ask ourselves whether there has been a structural deterioration in earnings prospects, assets or dividend policy.

Crises come and go.
Julie Dickson

Julie Dicksonequity and multi-asset investment directorCapital Group

Recession is gradually emerging as a major theme. Yet disruptions and crises are always part of market life. Is there any reason to be more pessimistic today?

I have been in the asset management business for almost 30 years. And you know, crises come and go. Markets have always found a way to recover and there have always been problems. The challenge is more with the companies that have grown very rapidly as a result of the pandemic and they have to maintain that. They're going to go back to the more normal long-term situation that they had before the pandemic. Some internet companies fall into that category.

It's not our job to announce whatever the theme is for the next six to eight months or two years. Our job is to look for the companies that are going to come out of this and continue to thrive five or ten years from now. Finally, crises are not just a challenge in terms of returns for investors. They also open the market to investment opportunities.

So this is the time to identify new investment opportunities?

When markets correct, you sometimes find opportunities. This is the case with companies that were doing very well and suddenly experience a 10% loss in price, even though nothing has structurally changed and they are still in a growth situation. It is in such cases that opportunities arise. There are challenges, but there are also very important opportunities. And having a long-term investment view has allowed us to weather the storms quite well. Not to mention that we don't always have to place an order. When volatility is as high as it is now, the turnover in our equity portfolios is on average about 25%. So in a crisis or high volatility situation, we can very easily take our foot off the gas and take the time to understand what's going on in the dynamics of the companies and the market environment.

I don't think it's a question of deglobalisation.
Julie Dickson

Julie Dicksonequity and multi-asset investment directorCapital Group

Equity markets are entering a new life cycle. What will that cycle be? Will it be one of deglobalisation?

We are clearly entering a new cycle of much higher interest rates than in the last 14 years. In that sense, there is a new cycle. However, this cycle will vary from one part of the world to another. The end of the economic cycle in the US is different from the end of the economic cycle in the UK or continental Europe, China and the emerging markets. My impression is that there is less synchronisation than before. I don't think it's a question of deglobalisation, but rather a differentiation between the different economies and the supply and demand dynamics that they have.

And what about the strategy of sticking to the stocks of companies with the best fundamentals? Do markets always reflect company fundamentals or is there a decorrelation between the two?

Whenever there is a major move in the markets, there is always both the risk and the opportunity that the price will be out of line with the market. When markets tend to be driven by sentiment, as they have been in the last two weeks, as they were at the end of February 2022 and as they were in March 2020, this presents challenges. On the one hand, because market prices do not reflect the fundamental strength of companies in some cases. On the other hand, the situation presents opportunities, as the markets do not reflect the fundamental strength of some companies. It is in periods of high volatility that there are more interesting and numerous entry points into the market. Dividend-paying companies become much more attractive, both because they start to grow much more and because they now provide really solid returns. Yields that continue to rise create a dividend-friendly environment. Companies that pay dividends tend to be less volatile and tend to provide a bit of a higher yield even when prices are falling. In particular, companies that have been able to pay and grow their dividends over the last two or three years in the hardest hit sectors are really attractive to us.

From a long-term perspective, we have not changed anything.
Julie Dickson

Julie Dicksonequity and multi-asset investment directorCapital Group

So your investment approach hasn't really changed?

From a long-term perspective, we have not changed anything. We still do fundamental analysis and long-term investing. We only invest in companies that we believe in, no matter what happens in the markets. The only thing that changes is the price you pay for it.

Otherwise, do you think that the value and growth strategy is still relevant?

We don't look at the markets from a growth and value perspective, but rather from a growth and income perspective. There are a lot of growth companies that are either expensive or cheap, but pay no dividend. Other companies that pay dividends are very expensive. On the other hand, there are those that are considered high growth companies and pay dividends.

With the new life cycle of the stock market, is there a geographic region you focus on to identify new winners?

We don't divide the investment universe by geography at all, unless it makes sense for a specific industry, like China. Most of the companies we invest in are either regional or global. It's been almost 14 years since we moved away from a geographical approach to investing. And regardless of the trend towards deglobalisation, the market is full of global and multi-national companies. Therefore, looking at where they are based is far less relevant than looking at where they actually generate revenue. Revenue growth by geography is more important than where a company is based.

I don't see the end of the stock market.
Julie Dickson

Julie Dicksonequity and multi-asset investment directorCapital Group

If the geographical approach is not relevant, what about the sectoral approach?

Our investment decisions are bottom-up. Our managers do not select the companies they want to invest in themselves. They are aware of their colleagues' choices, but this does not influence them. It is up to them to decide on the stocks to meet the objectives we have set for their funds. No one dictates any sector weighting to them. It is entirely up to the discretion of each portfolio manager. Thus, the sectors in the portfolio are the result of the individual conviction of each manager.

Given the current bear market, might not some investors opt for a retreat into private equity?

If there is one thing I have learned over the past 20 years, it is that with the increase in information flows, there is not much left to analyse. You can absorb all the information and make a decision quickly. Private equity, on the other hand, is an area where there is less liquidity and therefore more research is required. Not to mention that there is much less information available in this area. So I don't see the end of the stock market. On the contrary, the recent corrections are even an interesting entry point into the equity markets. But this is not the time to pull out either. It is important to stay invested with a long-term view.

Originally published in French by Paperjam and translated for Delano. This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.