Growth investors were bruised by 2022’s harsh market rotation but Stonehage Fleming's Gerrit Smit says some of the quality-growth stocks he backed when they sold off represent “standout” opportunities for the coming year.
Last year was challenging for most investors, but especially those holding growth stocks – which sold off aggressively as central banks hiked interest rates to tackle soaring inflation. Value stocks, on the other hand, fared much better.
Performance of indices in 2022
Source: FE Analytics
“Volatile market conditions did, however, create opportunities to refine portfolios. We initiated holdings in some exceptional businesses that we had previously considered to be overvalued,” Smit said. “But we continue to see outstanding investment opportunities in 2023, particularly for quality-growth companies which may enjoy more supportive conditions amid a bleaker economic outlook.”
Below, Smit – manager of the £1.7bn Stonehage Fleming Global Best Ideas Equity fund – highlights three themes that he thinks could pay off in 2023 – and six stocks he owns that are tied into them.
Healthcare
“Many healthcare companies faced a challenging 2022 as the lingering consequences of the Covid-19 crisis impeded their performance. Tight US labour markets, hospital staff shortages and supply chain constraints for device components prevented many of these companies from clearing the large backlog of procedures that built up over the pandemic crisis and since,” Smit said.
However, healthcare is one of the areas where the manager sees opportunities in the coming year as strong companies work through these challenges. He highlighted US multinational medical technologies corporation Stryker as being attractive.
It faced supply chain constraints in the first half of 2022 that limited its hospital equipment sales but this was resolved in the autumn and organic growth has returned to pre-Covid levels, with its share price starting to recover. “It is now in the position to better address the large backlogs for its critical procedures and utilise its strong organic growth potential,” Smit added.
Edwards Lifesciences – which specialises in in artificial heart valves and hemodynamic monitoring – struggled for growth in 2022 due to staff shortages in hospitals and its share price suffered as result. But Smit said these staff shortages and hospital inefficiencies seem to be improved while the extended waiting lists suggest Edwards Lifesciences will experience good organic growth for some time.
The Chinese consumer
China’s zero-Covid policy has had a significant effect on the Chinese consumer theme. While China’s retail sales had caught up with the US’s retail sales before the pandemic, the latter currently exceeds it by more than a quarter after China continued to lock down large sections of it population. But Smit argued that this gap is about to narrow meaningfully now China’s broad lockdowns have come to an end.
“LVMH is a particularly strong candidate in this context,” the Stonehage Fleming Global Best Ideas Equity said. “Its brands like Dior, Louis Vuitton, Celine, Bulgari and Tiffany’s resonate strongly with Chinese consumers, while its focus on owning its distribution ensures strong pricing power. A resumption of international travel by Chinese tourists should not only boost its travel retail business but also help support continued strong luxury demand in the US and Europe.”
He also likes US sports giant Nike for this theme, noting that it has a high-margin China business that achieved double-digit organic growth in pre-Covid times. But it reported four straight quarters of negative organic growth under zero-Covid, before returning to positive territory in the most recent quarter.
“Nike’s continued innovation in manufacturing and direct-to-consumer marketing and its success in customising marketing for the China market stand it in good stead to recover to consistent double-digit organic growth,” the manager added.
De-globalisation and automation
Thanks to rising geopolitical tensions and the recent dislocations of global supply chains, businesses have been increasing reshoring activities to minimise disruption to their operations. In many cases, this involves a move west and a reversal of the cost advantages offered across Asia.
Smit noted this trend has been supported by the US Inflation Reduction Act, which offers tax breaks on the significant capital expenditure needed to install facilities onshore. By automating these new facilities, companies can balance the cost equation in a more expensive labour environment. Also, businesses continuously automate more and more of their operations to enhance their profitability.
The manager said Japanese sensors firm Keyence is a beneficiary of this theme as it effectively provides “the eyes to automation” and is deepening the penetration of these systems in factories and warehouses worldwide through continual enhancements. Keyence is the world leader in designing and installing these sensors and is highly profitable and cash generative on account of its pure service business model.
“Semiconductor powerhouse ASML hugely benefits from this theme. Semiconductor companies are particularly notable participants in this migration onshore, with the US CHIPS Act further incentivising the sector,” Smit finished.
“TSMC, Samsung and Texas Instruments have committed to spending almost $100bn between them on new factories in the US. Providing state of the art lithography equipment to these new semiconductor manufacturers, ASML is a major beneficiary of this wave of new investment, enabling these companies to manufacture the world’s highest performance, cutting-edge chips.”