Adam Alexander, portfolio manager of Australian equities at Schroders, has encouraged investors to look beyond short-term noise when investing in the local share market.
On a recent episode of the Relative Return podcast, Mr Alexander reflected that the market has been “very dynamic” since he first joined Schroders 18 months ago.
“I think interest rates going from zero virtually a couple of years ago, they’ve gone up faster than anyone thought over the last 18 months, and that’s really put a lot of pressure on the consumer. At the same time, we’ve got some geopolitical events in the Middle East,” he said.
“That’s causing some real confusion, I think, for global markets and you’re seeing a bit of a disconnect between some of the commodity prices that are moving around, and we’re trying to analyse how that should affect the Australian market.”
According to Mr Alexander, Schroder’s seeks to value companies on a mid-cycle basis.
“We get a lot of noise coming through on a daily basis in equities, and our job is to really try and sort the noise out and work out whether or not it will actually impact the value of a company long term,” he explained.
“When we’re looking at the companies, we’re sort of forecasting what we think their earnings will be a couple of years out and then, as share prices move around as they obviously have done over the past six months both up and down, it gives us an opportunity to say, right, what’s driving the share price short term? Do we think it’s going to impact our numbers?”
If the firm determines that these shorter-term movements do not impact its view, Mr Alexander said this provides an opportunity to buy a stock that others may be selling.
“We think we’re sort of mid-term, really medium-term investors, and I think one of the best parts about it is to try and take advantage of moves in the market,” he continued.
“When you’re sure you’ve done the work on the models, you know the management team, share price moves around short term, I think that provides ... volatility is not necessarily a bad thing. It does provide investors with good opportunities to enter stocks where they look good value.”
Asked to identify which sectors Schroders currently sees potential in, Mr Alexander indicated that the firm is staying away from discretionary retail companies.
“We think that, as the consumer really tightens up, that’s going to be difficult. But what is on the other side of that is companies that offer good value to consumers in the market at the moment,” he noted.
“As you see, consumers sort of trade down, look for value, then companies that have a value premise will do quite well.”
These include Wesfarmers-owned Kmart and Bunnings, which Mr Alexander noted are experiencing a strong trading period. Furthermore, he suggested that supermarkets are looking attractive at present, since more Australians are eating at home and these businesses have been able to consistently raise their prices.
“That’s something that we’ve really looked into through this inflationary period is companies that have been able to demonstrate some really good pricing power across the market,” Mr Alexander added.
Another company that falls into this category is pallet maker Brambles, which Schroders expects will generate higher returns in the future and has been adding to its portfolio.
Looking ahead, Mr Alexander said he is confident that the investment process adopted by Schroders will stand the test of time.
“Given our process, that sort of focus on the mid-cycle, we tend to look at performance over a two-to-three-year window and I think being invested in the market for that medium term is what investors really need to think about,” he said.
“Moving in and out on six-monthly basis and seeing the news flow sort of throw markets around and create volatility, I think you’ve got to take a bit of a long-term view.”
This includes looking at companies and their earnings, the cash flows they can generate, and the excess returns they have been able to deliver over a longer period of time.
“On a six-month view in terms of performance, that could go anywhere, but on a two-to-three-year view, we’re confident that at Schroders, our investment process will stand the test of time and do well in a variety of market conditions,” he concluded.
To hear more from Mr Alexander, click here.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.