Staying Focused on Secular Growth
Staying Focused on Secular Growth
What are the key themes likely to shape markets in 2019?
Broadly, I think the key themes will be the continued rise of populism globally and, related to that, questions around open borders and open trade. In addition, inflation is reemerging in many parts of the world, particularly in the U.S., where we are seeing stronger wage growth as a function of full employment. Some companies are also experiencing input-cost inflation due to tariffs. Meanwhile, the U.S. is stepping back from years of quantitative easing, which has started to slow rate-sensitive parts of the economy. Given that inflation helps determine central bank policy and the risk-free rate influences the valuation of all companies, if inflation and, therefore, rates continue to rise, we could see a broader impact to the market.
Where do you see the most important opportunities and risks within your asset class?
We continue to focus on what we always do: looking for companies that we think are market leaders and that have business model advantages such as pricing power, low input-cost risk and the ability to gain market share. For example, a payments network is not reliant on leverage or the global supply chain to drive growth. There is limited, if any, additional cost for every incremental dollar of revenue that the business generates.
At the same time, we may be entering a period during which Main Street does better than Wall Street. For consumers, wages finally are rising and the economy remains in relatively good shape. In contrast, many companies could be facing a very different environment from the past decade, during which earnings growth was often achieved through financial engineering and productivity increased through global outsourcing. Rising interest rates, trade barriers and elevated debt levels on corporate balance sheets could make it harder for certain companies to generate growth.
How have your experiences in 2018 shifted your approach or outlook in 2019?
We remain comfortable owning companies that we believe have opportunities to gain market share and are benefiting from secular tailwinds. We think the companies we invest in are built for different macroeconomic environments. In the short term it is often unclear how the stocks of these companies will respond to market volatility. But in the long term we believe growth fundamentals remain strong, especially for those companies that have built robust network effects, which occur when increased usage of a firm’s product or service enhances the value of those goods to consumers.
Annualized Wage Gains and Core Inflation
Inflation is reemerging in the U.S. as full employment leads to stronger wage growth.
Source: Bloomberg, as of 9/30/18
Notes: U.S. core personal consumption expenditures (PCE) and average hourly earnings, year-over-year growth (%), based on monthly data.
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