Where to hunt for global equities opportunities in 2022

>Where to hunt for global equities opportunities in 2022

Interviewer Sean Aylmer: Today, I'm speaking to Chris Lees Senior Fund Manager at J O Hambro Capital Management. Chris, what are the lessons that we can take from 2021 into this year?

Chris Lees: I think one of the number one lessons for everyone is that humans can't forecast. Read a book called Super Forecasting to understand what I mean. But what we can do is assess various different scenarios. So we have a ruthless process that is evidence-based probability-adjusted and as you look at the evidence around you on a daily basis, the highest probability outcome is probably more the same, which is more variance, more worries, and a growth slowdown. Not a recession, but just a growth slowdown is the highest probabilities. We look at the evidence. China was the first major economy into, and then out of COVID and the first to slow down again in a meaningful way. US, Europe, Australia are following. The good news is that that means it's probably way too early to get very defensive with your investments. The good news is that credit spreads are still well behaved. The fed is now probably ahead of the curve again, and it's probably equity and bullish.

Interviewer: Okay. So, so what are the sectors then, if your equity and bullish, what are the sectors that you would look at over the next 12 months or so?

Chris Lees: Well, cyclicals are called cyclical for a reason. Think about that folks. The clue is actually in their title. So I think at the margin, you should be selling some cyclicals because we've had the first COVID rebound. Now we're looking at slow down and usually that's what happens and the cyclicals and the tend to perform not so well. And the mid cycle stocks tend to perform much better as clearly we're in the mid cycle now. And that tends to be areas like healthcare. Healthcare used to be quite expensive, it used to have disappointing earnings growth. But looking ahead, I think healthcare joins tech as being the best two sectors. So you want some more the same in your portfolio, which is tech on our process. It's still what we call two green lights. It's a green light for the best fundamentals in the world. It's a green light for the best trend in the world. And healthcare looks like it's moving that way to becoming two green lights for next year. So at the margin, as I say, sell some cyclical and buy some healthcare stocks to add to your existing tech winners.

Interviewer: OK. Tech still has a way to run?

Chris Lees: Yeah, it does. It's it's not expensive. It's probably fair value. And if you remember a great quote from Albert Einstein, Albert Einstein said compound interest is the eighth wonder of the world. Those that understand it, earn it. Those that don't understand it, pay it. And some of these tech companies are fantastic compounders and they're still attractively valued.

Interviewer: Okay. What about the sectors that you don't like so much?

Chris Lees: Well, at the moment we don't particularly like the defensive sectors. I mentioned earlier, it's probably too early to get very defensive. The defensive sectors are not really outperforming. At some point they will, as we transition from mid cycle to late cycle. But our evidence-based probability adjusted process says that that's not where we're at yet. So we're avoiding the defensive sectors. We actually think fossil fuels are a stranded asset, and there's nothing new here. Think about when the global economy transitioned from the canals to the railroads, it was a catastrophic mistake buying canals, cuz they look cheap. And then, once things become value traps, they're bad investments. Then of course the railroads all went bankrupt in the west because the railroads transitioned to the automobile. So we'd see nothing new here really. It stayed a normal transformation in the global economy from one source of power to another. So we would be sellers of the rallies and fossil fuels. The flip side on the commodity complex is we're very bullish long term on the green renewable power story for future facing commodities like copper, like lithium, like battery materials. So if you wanted a decade long theme, I would say sell the rallies in traditional fossil fuels buy the dips in future facing commodities.

Interviewer: Okay. When we put all that together in portfolio construction, how heavy would you go equities?

Chris Lees: I would still be the significant portion of the portfolio in equity. I would still be heavy in equities, probably not as super heavy as you might have been a year ago on that transition from early cycle to mid cycle. But with the fed now being on top of its game, I think you can have a nice balance of being slightly overweight equity, slightly underweight, fixed income and at some point that will change. And when it does will change accordingly. As I said, don't forecast folks have a process that is evidence based probability adjusted and as the probabilities evolve, then evolve your portfolio and do it incrementally. Don't be a hero. Don't go all in on, on some forecast, just you wanna be incrementally moving your portfolio. So it's compounding for you that great quote from Einstein, and equities over time compound very nicely for you. Occasionally, you need to get defensive, keep your eyes open for that. But until that point, I would say you want the majority of your long term wealth creation in equities.



  • Where to hunt for global equities opportunities in 2022

    13 Jan 2022 | 6 mins

  • Christopher Lees

    Senior Fund Manager

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