Where investors can find value in uncertainty

Oksana Patron

31 July 2023

Productivity benefits from technology and a debate around hard landing versus soft landing have become the key disruptive themes emerging from the current environment, as inflation starts to ease, according to DNR Capital.

This will present market with new opportunities as a very long period of uncertainty has driven some quality companies to trade at discounts.

The first of the two key themes looks at the balance and what will come out of benefits of AI, technology and ageing population versus the ongoing spend that is needed to transition to a zero carbon future, while the second theme focuses more on what has driven the economy resilience despite rising interest rates.

“Clearly interest rates are on the way up and ordinarily we would expect the economy to slow in response to that. We have seen some evidence of slowing but the economy has been resilient to date. And that remains a key area of debate,” Jamie Nicol, chief investment officer at DNR Capital, said.

“What this means from a market and opportunities perspective is that after a very long period of uncertainty the outcome of these debates is not clear.

“This environment has provided a rare opportunity to invest in good quality businesses that perhaps are getting disrupted through hiccup in earnings, change in CEO, or a range of events which are causing some of these better quality companies to trade at discounts.”

As examples, Nicol cited two companies SEEK, with its earnings tied to the economy due to job numbers, and CSL, a more defensive but also disruptive stock.

In case of the first company, Nicol said, uncertainty meant investors were gravitating away from it and this created an opportunity for investors as its stock price had become reasonable.

“We believe SEEK has a long-term opportunity to continue to lift prices and continue to expand into new markets. We think that will drive very good EPS growth on a through-the-cycle view,” he added.

At the same time, CSL which is a market leader was trading at a reasonably weak level and the company saw a change of the chief executive.

“They did have a downgrade to near term earnings which was all about the recovery and earnings post-COVID, and perhaps the recovery is taking a little bit longer than what they initially expected. But the longer term trajectory still looks very good,” he added.

“We always like to buy in periods of uncertainty, particularly when we are unclear on what the macro framework looks like.

“We look for quality characteristics, good management, good businesses, good industry structure, competitive advantages, good ability to earn strong margins over the longer term because the market tends to gravitate back to those companies over time.

“And right now, investors can pick up some of those businesses at really good discounts.”