With value stocks growing in appeal amid sticky inflation, an investment executive has outlined which opportunities he will be watching closely in the market.
American Century’s global co-head of institutional, Matt Oldroyd, noted value stocks tend to do well in inflationary environments and be able to pass through some of these costs, though some industries can do it faster than others.
“If you’re setting up your portfolio right now, I’d be focusing on quality, focusing on companies that are able to responsibly pass through inflation, meaning they were also doing cost cutting and other things so they didn’t have to gouge their customers, like you’ve probably felt in spots like hotels, airlines, those sorts of things,” he told Money Management.
For the firm, value investing opportunities in Australia have mostly existed in the country’s “pretty healthy” banking system, however it’s a bit too rich at the moment, he said.
“The banking system is pretty healthy, and as you know, the US banking system had a little bit of a struggle earlier this year. But that said, we don’t currently have any Australian banks in our portfolio, just because the banks in the US are more attractive from a value perspective, and as long as we don’t think they’re going to run into significant trouble, we’re going to go where there’s discount on stock price,” Oldroyd said.
As at the end of October, Commonwealth Bank shares are down some 3.2 per cent year-to-date, trading at around $97.80, compared to NAB (down 3.4 per cent to $28.4) and Westpac (down 9 per cent to $20.6).
Of the big four banks, ANZ has been the only stock to see gains, rising 8 per cent to $24.8 year-to-date.
While American Century keeps an eye on the Australian banks, there are just better alternatives elsewhere at the moment, Oldroyd contended. Instead, a local offering presently in the investment firm’s portfolios is an industrial company that focuses on plumbing fixtures.
“[Reliance Worldwide Corporation] is the number one market share in what’s called ‘push-to-connect’ fittings and they’ve had some trouble with copper inflation. So you get the theme here – we’re always looking for these high-quality, long-established companies that pay a nice dividend, and I think their dividend is in the high 3 per cent range,” Oldroyd explained.
“The other nice part about them is that they’re on a genuine sustainability path, not just in their greenhouse gas emissions, they’re looking to be carbon neutral. Also, they do a lot of work on worker safety, so it’s not just climate issues.”
Oldroyd, who was formerly head of corporate sustainability at the firm, also observed how the impact of climate issues globally has set the stage for property and casualty insurers as a sector to watch.
In American Century’s Q4 2023 Investment Outlook, it noted that US-based insurer State Farm reported a 130 per cent combined loss ratio in automobile insurance earlier this year. Similarly, insurer Allstate reported a net loss of $1.4 billion in the second quarter of 2023 because of severe weather.
“It’s an interesting one, especially in the US [where] they’re struggling with replacement costs,” he observed.
“In 2022, for every dollar of automobile insurance State Farm wrote, they lost 30 cents because if someone totalled their car and put in a claim, the replacement costs for that car are now higher than when you bought it because of inflation.”
He turned to similarly promising opportunities in utilities, which have often been considered “bond proxies” when interest rates were low, as well as the healthcare sector.
“Mainly for us, it’s in medical devices. These are companies that haven’t fully recovered from the downturn in elective surgeries during the pandemic,” Oldroyd said.
In the case of Zimmer Biomet, an NYSE-listed orthopaedic solutions company in the American Century portfolio, there are still flow-on effects from the pandemic, he said. Year to date, the price has declined almost 19 per cent, trading at around US$103.
“During COVID, you put off these kinds of surgeries because you don’t want to go into the hospital and they didn’t want you coming in because they were dealing with an influx of covid patients, so [these surgeries] got pushed back, which hurt these companies’ revenues.
“It’s starting to come back now, but they still have a pretty big backlog because they then got it with labour shortages and supply chain issues.”
Interestingly, the firm does not own any of the Magnificent Seven tech stocks right now in any of its portfolios, though Oldroyd reiterated the firm is not opposed to AI-themed exposures.
“We’ve looked at NVIDIA but we never owned it. We did own Microsoft,” he told Money Management.
“I wouldn’t say we’re avoiding AI exposure; we’re going to be driven by valuation, and unfortunately, right now, anything that has sort of an AI theme around it has been way too expensive for us. In fact, I would say that the places we’re finding the most opportunities are going to be defensive, or what some might call boring.”
