Market Update from Nudgem Richyal, JOHCM Global Select Fund

>Market Update from Nudgem Richyal, JOHCM Global Select Fund

Host:
Thanks for joining us today, where I am joined by Nudgem Richyal, manager of the JOHCM Global Select Fund, who will update us on how the volatile start to 2022 is bringing opportunity in global equities and how he is approaching the market. Where does the tech sector fit into global equities portfolios right now? Are we seeing the end of the dominance of that sector, or is it a pause?

Nudgem Richyal:
Let me take you back to 2008, 2009. That's when we incepted the product at J O Hambro. And one of the funny things is that we went out saying tech looks like it's going to be a leading sector for the foreseeable future. And it's quite funny because at the time, one of the major asset management houses was actually closing their dedicated tech fund. And it's usually a sign that something's about to turn. It's been a while since 2008, 2009 and to the question often that comes to mind is, have we come to the end of the tech cycle? We think it's still open for question. Clearly January has not been generous to tech and I think that's understandable. Anytime you go down the road of a potential rate hike cycle, because technology and to some extent biotech and pharma as well usually fall into this category, seen as long duration stocks, and so the net present value is hostage to the discount rate.

Nudgem Richyal:
And as the market starts to worry about the discount rate rising, the tech sector's highly sensitive to that. And so right now, we're in this, if you want, whether we're in this kind of moment where the market has decided to worry about a rate hike cycle, and that's not a great place for tech itself. And then within that, you have obviously stratification, what we would call the concept stocks, the stuff with very little revenue or no revenue and it's all about the terminal value, they're the most at risk. And you've seen that, as you've seen huge decreases in market cap of, and I'm not picking on these names, I'm just giving you an idea. You look at the electric vehicles companies, especially ones that went public via the de-SPAC route have lost a lot of market cap in the last few weeks. And the market right now sees that rates are going up and these are long duration stocks. And therefore we need to really take an ax to the terminal value.

Host:
There's plenty of money looking for opportunities and these longer duration stocks are less attractive on a valuation sense. Where would you be looking to put that money?

Nudgem Richyal:
I'd answer that in two steps. One, in fact, you want to sharpen your pencil, because there might be some early birthday presents as Chris would say, my co-manager on the product through this year. So some of these stocks, which are actually pretty good business models and maybe the valuation just got a little bit over extended. And then this will be a healthy correction for those type of names. Who wouldn't have loved to have bought Amazon in 2002? Who wouldn't have loved to have bought Netflix in 2009? So you'll get those kind of opportunities within this actual space. And that's one way we're looking at it. The other way we're looking at it is that we think it's too early to really bet on a regime shift, a complete regime shift. Why do I say that? At the moment, the commentary seems to be hawkish and there's just been this idea for a long time that the Fed put that protects the equity market on the downside.

Nudgem Richyal:
But we haven't even had a rate hike yet. So it's just too early to decide whether there will be a real wholesale regime shift. So look at it as being able to pick up some early birthday presents through this year. But the other thing to bear in mind is value rallies tend to be short lived. So if you look at the other side, okay, which are the short duration stocks and how do they fare in this type of market environment? Generally they tend to do well, but it doesn't last that long. So that becomes a market timing issue. And then the last thing I just want to quickly add is if growth starts to slow, is there really going to be much longevity to the rate hike cycle?

Host:
If I have got money to invest, where should I be putting it? How should I be thinking right now? Given the volatility and the economic prognosis that we have in front of us, what should I be looking for?

Nudgem Richyal:
We're looking for good fundamentals at the right valuation and prices which are in an up trend. So when it comes to any particular stock, sector, or geography, those are the three things we're really keen on. What are the fundamentals like? What are you paying for them from a valuation perspective? And is the share price headed north? Because we want to buy something that's going up, which carries on going up. And so we'll carry on focusing on those types of companies. We'll carry on focusing on those neighborhoods and in those geographies.

Host:
How many stocks do you look at in a year?

Nudgem Richyal:
It really varies. This year, I think we are going to be looking at more than our usual number of stocks, again, because the dislocation is going to throw up a lot of opportunities. Periods like this, our stock going to through all the recent IPOs of the last two years, because some of them will become orphaned. Back in 09, 2010, we picked up KKR in our product because they had done some very interesting corporate restructuring. And actually then we picked up two of the companies that they themselves IPOed, NXP and Avago, which went on to do really, really well. So I think this year we'll be probably looking at more than two to three names per week, just because we are going through what came to market in the last couple of years, what spun off.

Nudgem Richyal:
Because often also what you see in market dislocations is for reasons of shoring up the balance sheet, crown jewels are sometimes spun off because that's what the bank has encouraged the corporates to do. Two things, obviously we've had this whole de-SPAC situation. So I think this year we'll be looking at a lot more companies than usual, but usually I'd say between Chris and myself, it's just one stock each a month. It's a very low maintenance management of the product.

Nudgem Richyal:
And we run an equally weighted portfolio as well because we've got good conviction in the names that are in there. And that makes it, I'd say very straightforward, because if you look at the product at any point in time, you can see those companies that are doing well, but equally you can see those that are not doing so well. So if we feel there's any ambiguity in the names that aren't doing so well, we can always shoot first, ask questions later. But I'm just contrasting that with what I think is going to be, or is already the reality of this year, where given the dislocation, we'll be doing a little bit more than our usual operating maintenance on the product and a portfolio.

Host:
Thanks to you listeners for giving up the time today. If you want to know more about Nudgem, J O Hambro, or the JOHCM Global Select Fund, then please visit johcm.com.

Podcast

  • Market Update from Nudgem Richyal, JOHCM Global Select Fund

    21 March 2022 - 6 minutes

  • Nudgem Richyal

    Senior Fund Manager

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