Article
Innovation at a discount
Angus Muirhead, Head of Equities in Credit Suisse Asset Management, about the new focus in equity investments.
July 21, 2022
Following a sharp drop in equity markets, it seems that many investors are tempted to cut their losses. What are your thoughts?
Angus Muirhead: I think it’s a very natural reaction. Nobody enjoys losing money, and it’s human nature to cut our losses when we experience pain. Risk aversion can, of course, be very useful in certain situations and is linked to our fight or flight survival instinct. However, in other situations, it can limit our ability to make rational decisions.
The current market backdrop provides the perfect storm of myriad fears and uncertainty. With negative sentiment all around, the perceived fear of loss is so great that it becomes difficult to see any potential opportunities.
But, given the uncertainty, isn’t “flight” the right course of action?
The market often goes through these periods of extreme sentiment, both positive and negative. The negative periods often stand out more, because the movements tend to be sharper. You could say that the market goes up on an escalator and comes down in an elevator. Predicting the short term is notoriously difficult and this is why our thematic strategies focus on long-term secular trends.
It’s difficult to imagine exactly how the current situation will be resolved, but we should remember that most of the things we’re concerned about are already in motion: inflation, rising interest rates, war in Ukraine, COVID lockdowns in China, supply chain delays, and a fear of recession. They’re also related. End the war and beat COVID and the other issues should dissipate.
If we cut our losses at this point, it feels to me that we are late and reacting to issues that the market has already largely discounted. Equity markets started to price in many of these issues from October 2021 and other risks have started to be priced in over the last few weeks and months.
Are you suggesting that the equity markets have hit bottom?
Unfortunately, we can’t say that with any real certainty. Nonetheless, we can say that the price of most securities has fallen sharply and that valuations are generally more attractive now than a few months ago. Of course, the caveat is that the economic outlook is likely to be weaker than was expected six months ago due to higher interest rates, higher input and labor costs, and supply chain challenges. Therefore, we should assume lower revenue growth and earnings power for some companies in the valuation model.
So in a simple price/earnings multiple, the P has fallen, but the E has fallen too?
In many cases, yes. But remember, the stock market is vast and no company is exactly the same as any other company, so the extent to which the growth and earnings power of a company are affected by these issues is highly heterogeneous. Currently, in spite of the market sell-off and the challenges in the world, many of our portfolio companies are reporting very strong end demand from clients. Therefore, we believe it is critical to perform deep-dive fundamental analyses and to be highly selective in stock selection.
Should investors shift from growth to value stocks?
I think that shift has already happened. However, we should also be careful about the definition of value stocks. Does “value” simply refer to low valuation multiples? Our view is that “cheap” is often not a good indicator of value. It’s more important to identify exceptional companies and to buy them at a price below your estimate of intrinsic value. Growth, in revenues and earnings, is of course a key component of the calculation of intrinsic value, and therefore the terms growth and value cannot be unbundled.
What measures are you taking in portfolios in this environment?
Everything has sold off to some extent, in particular, innovative, small to mid-size companies with great long-term growth potential, but which are not yet operating at scale or have yet to break even.
As markets have pulled back, most stocks in our pure-play Thematic Equity universes are now more accessible in terms of valuation. So we are using this opportunity to “high grade” our portfolios. Buying the stocks of companies in which we have the greatest conviction and where we find excellent management teams, strong business models, ESG credentials, IP (intellectual property), and well-differentiated solutions. In most cases, we are looking for the ability to consistently stay ahead of the competition through innovation.
What is your expectation for the rest of the year?
With so many significant macroeconomic and geopolitical issues in play, equity markets are likely to remain volatile. Nevertheless, periods of extreme volatility often create opportunities for the long-term patient investor. An age-old adage is that time in the markets is worth much more than timing the markets. The challenge is to try to imagine the most logical scenarios. Not to predict, but to plan for a number of different outcomes.
It is likely that some signs of resolution around the key issues will be necessary before we see a genuine recovery in the market, but sentiment often recovers on the expectation of a brighter future, long before it becomes reality. As a result, we prefer to stay invested, but be highly selective in our exposure.
Angus Muirhead
Angus Muirhead has 25 years of professional investment experience in equities, on the buy-side and on the sell-side. Angus Muirhead was appointed Head of Equities at Credit Suisse Asset Management on September 1, 2021. He remains Head of Thematic Equities and lead portfolio manager for the Credit Suisse Robotics strategy.
Angus Muirhead joined Credit Suisse Asset Management in 2016, as a Senior Portfolio Manager in the Thematic Equities team. He started his investment career in 1997 as a buy-side equity analyst at Phillips & Drew Fund Management in London, before moving to Tokyo in 2000 to focus on the Japanese technology and healthcare sectors. In 2007, he moved to Zurich as a Portfolio Manager specializing in global technology and healthcare-related thematic equity funds.
Inflation: “Some days you tame the tiger. And some days the tiger has you for lunch.”
To what extent and for how long will inflation rise? The uncertainty surrounding the effects of inflation has increased massively. The current situation is calling for existing investment strategies to be reviewed and new opportunities to be evaluated.
This material constitutes marketing material of Credit Suisse Group AG and/or its affiliates (hereafter "CS") and provides information on a strategy. This material does not constitute or form part of an offer or invitation to issue or sell, or of a solicitation of an offer to subscribe or buy, any securities or other financial instruments, or enter into any other financial transaction, nor does it constitute an inducement or incitement to participate in any product, offering or investment. This marketing material is not a contractually binding document or an information document required by any legislative provision. Nothing in this material constitutes investment research or investment advice and may not be relied upon. It is not tailored to your individual circumstances, or otherwise constitutes a personal recommendation, and is not sufficient to take an investment decision. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable. CS provides no guarantee with regard to the content and completeness of the information and where legally possible does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. The information provided in this material may change after the date of this material without notice and CS has no obligation to update the information. This material may contain information that is licensed and/or protected under intellectual property rights of the licensors and property right holders. Nothing in this material shall be construed to impose any liability on the licensors or property right holders. Unauthorised copying of the information of the licensors or property right holders is strictly prohibited. This material may not be forwarded or distributed to any other person and may not be reproduced. Any forwarding, distribution or reproduction is unauthorized and may result in a violation of the U.S. Securities Act of 1933, as amended (the “Securities Act”). In addition, there may be conflicts of interest with regards to the investment. In connection with the provision of services, Credit Suisse AG and/or its affiliates may pay third parties or receive from third parties, as part of their fee or otherwise, a one-time or recurring fee (e.g., issuing commissions, placement commissions or trailer fees). Prospective investors should independently and carefully assess (with their tax, legal and financial advisers) the specific risks described in available materials, and applicable legal, regulatory, credit, tax and accounting consequences prior to making any investment decision.
Copyright © 2022 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved.