Looking towards FY2025 and beyond, investment managers are highlighting US inflation and global takeover activity as major themes to watch.
One of the central concerns gripping the market is the trajectory of US inflation, which has proven to be more persistent than anticipated.
Vihari Ross, Antipodes global equities portfolio manager, believes that this trend might endure, especially with the economy displaying resilience.
“We believe this trend could continue – and with the economy also remaining relatively resilient, investors need to be open-minded to the prospect that rates will remain higher for longer,” Ross said in an ASX investor update.
“While US inflation is on a downward trend, upward pressures on rental costs, a key component of core inflation, could prevent inflation falling below 3 per cent by the middle of the year.
“A lack of supply of new housing is driving rental costs higher by 5.7 per cent plus, feeding into core inflation which hit 3.8 per cent on an annual basis in February, down slightly from the 3.9 per cent rate recorded in January.”
As such, Ross warned against premature rate cuts by the US Federal Reserve, fearing that such moves could reinvigorate inflation due to the economy’s robust performance. The consensus on rate cuts for 2024 has already shifted from 140 basis points to around 80 basis points, signalling a cautious approach to monetary policy.
Despite these challenges, investment opportunities persist at the stock level, Ross said.
Antipodes, she elaborated, employs a pragmatic value strategy, seeking undervalued investments with robust business resilience and growth potential across various economic conditions. This approach includes a diversified portfolio and a focus on sectors poised for potential growth, such as global cyclicals with compelling supply and demand dynamics.
Adding to this, Ross said: “Antipodes has also selectively added to global cyclicals with attractive long-term supply and demand dynamics that are showing bottom of the cycle characteristics such as inventory destocking, low levels of inventory and weak pricing, and are priced on low valuation multiples.”
Moreover, Ross explained that if the outlook for a soft landing becomes more likely, the firm plans to increase exposure to mature cyclicals and sectors aligned with long-term investment trends.
“In particular, multinationals listed outside the US but with significant exposure to the American market are potentially an attractively priced way to play the soft landing.”
The stage is set for global takeover activity
In the same ASX note, Catriona Burns of Wilson Asset Management (WAM) emphasised that conditions are “ripe” for a surge in global mergers and acquisitions (M&A) activity.
According to her, the macroeconomic environment, marked by stabilising interest rates and improved company valuations, is conducive to increased deal making.
Boards and chief executive officers, having navigated through challenging economic phases, are now considering strategic transformations through M&A, while financial buyers, including private equity firms, are also gearing up for active participation in the market, leveraging available capital for new investments.
“Relying on M&A is not part of WAM Global’s [WGB] investment thesis when choosing which companies to invest in, however, many of the companies WGB owns are potentially targets for dealmakers, in WAM Global’s opinion,” Burns explained.
She explained that the recent performance of stock markets has led to improved company valuations. This uptick in valuations has created opportunities for acquirers to unlock value through strategic acquisitions, leveraging their own shares as currency for financing deals.
“With market returns largely driven by a small subset of stocks in recent years, WGB sees many quality companies around the globe trading at attractive valuations, which have been left behind. With market returns beginning to broaden out, and confidence returning to dealmakers, WAM Global expects significant value to be unlocked.”
Looking at the increasing interest shown by private equity firms in M&A activity, Burns said that despite initial caution, private equity players are now deploying their substantial dry powder into new investments, particularly focusing on small and medium-sized businesses.
Meanwhile, the strategic imperative for businesses to adapt and transform amid changing economic landscapes has further fuelled M&A activity. Burns pointed out that boards and CEOs, incentivised to drive growth and enhance shareholder value, are increasingly considering M&A as a means to achieve strategic objectives and navigate evolving market dynamics.
