Uncertainties present new opportunities for equity investors

Market uncertainties will create two types of new opportunities for equity investors to buy stocks at attractive valuations, according to DNR Capital.

A first set of opportunities in this environment will be businesses that are starting to derate, especially companies with defensive outlook and the other opportunities will be related to stocks that are going to do well when interest rates peak.

Jamie Nicol, chief investment officer at DNR, said investors should look through the short term and think about what these companies are going to look like in three to five years.

He pointed to CSL as an example of a company with defensive outlook which is experiencing some issues however with a limited impact on its growth.

“We acknowledge its grappling with issues especially in the weight loss category. Yet we think it’s going to have very limited impact on its growth,” he said.

“CSL has a small kidney dialysis business that will potentially be affected a little, but it’s not much. So it’s caught up in that bucket causing the stock to derate, yet its outlook looks very strong and defensive. It’s not dependant on the economic climate to deliver a great outcome.”

As far as the second category of companies was concerned, Nicol said there were some cyclical stocks “where the market’s really thinking through the cycle and worried about the downside side risk.

“This throws up opportunities if investors are prepared to look through the cycle a little bit,” he added.

“An example of this is James Hardie, a company exposed to the US housing cycle. Higher interest rates are typically negative for US housing.

“But the difference with this cycle is that a lot of American mortgage owners are locked into 30 year mortgages at very low interest rates. They are unlikely to move and will need to repair and remodel their homes, which will be a boon to James Hardie over the next year and a half.

“At the same time, if a customer wants to buy a new home, they are most likely looking to buy off a new home project because there are not as many homes for sale just on the regular market. In this scenario James Hardie tends to do well with those large home builders.

“That’s why we think this company is producing really good results. It’s obviously a market leader, with great products and good margins.”