The sector that did well in the previous bull run rarely prospers in the next. If interest rates stay higher for longer then long-duration assets, such as technology companies, may struggle to see multiple expansion.
In the quest for alpha there are two things we think investors should consider.
Think truly global: For us this has meant increasing exposure to Japan. Asia is a long way from the troubles that we have in Eastern Europe. China (its main export market) is likely to emerge from lockdown and see economic recovery. And inflation is not a problem for Japan – it would love to import some.
Focus on company strength and quality: If trying to protect your clients’ wealth from inflation through investments then you should also focus on a company’s pricing power and the sustainability of its competitive barriers and moats. Be selective about quality and thoughtful about what you pay for it.
That does not just mean buying cheap stocks in the expectation that they will bounce on better economic news. This might work if you are looking for a quick shot of performance, but I think the word ‘alpha’ suggests something with duration.
We are trying to upgrade the stocks in our portfolios, buying high-quality businesses that can deal with inflation and have little or no debt. These are rarely cheap, but they are cheaper than they were.
Often they are companies with a tailwind, like demographic trends. The world’s population is ageing. The World Health Organisation expects the proportion of the world’s population aged over 60 to double by 2050 – from 12 per cent to 22 per cent (it is already more than 30 per cent in Japan). That is 2.1bn people, up from just 1bn in 2020.
We have been waiting for some time to buy a hearing aid maker at a reasonable price, confident that demand for these instruments will rise.
Sonova is a Swiss-based global leader in this area. Like many ‘quality growth’ companies, it saw its valuation became rather eye-watering a couple of years ago, with the price/earnings ratio approaching 45x at one point.
The shares have fallen recently, as consumers have delayed purchases and the company – like many others – has seen some inflation of input costs. The shares now trade at a multiple of 16.6x next year’s forecast earnings. Still pricey, perhaps, but cheaper than Apple – and we believe Sonova’s growth prospects look stronger.
Similarly, we have recently added a Japanese eyeglass maker to our portfolios. Hoya is a world leader in producing eyeglasses, contact lenses, photomasks for semiconductor manufacturing and glass discs for large data storage. All these sectors have long-term growth potential, and Hoya’s shares – like many in Japan – have fallen in sterling terms this year.
