Focus on valuations is key when it comes to global equities

There are many opportunities in global equities, but in volatile times, investors need to stay vigilant about valuations, says Bimal Patel, senior fund manager with Canada Life Asset Management.

Speaking on the Soundbites podcast this week, Patel said economic conditions can have a dramatic impact on the valuation construct that underlies even the most promising stocks.

“Great companies can make terrible investments if the valuations are too high,” he said. “They can become expensive.”

He said his equity valuation analysis tends to include a look at bond markets, interest rates, inflation and a macro view of the prevailing economic environment — all of which can have a big impact on equities.

“We saw really quite expensive stocks de-rate, mostly during 2022,” he said. “And even though many of these were good companies — you might have earnings growth of 20% — if the valuation falls in half, the stock is not going to work.”

Despite a fast-changing economic climate, he remains generally positive on global equities.

“Equity markets are great at passing through inflation. Over the long term, they grow with earnings,” he said. “From a long-term perspective, we continue to see equities as a good place to be invested in.”

He is especially bullish on companies that have pricing power. In the financial sector, for example, challenges related to climate change have chased some insurers out of certain markets.

“The insurers that are left are being allowed to price at levels they haven’t been able to in prior years,” he said. “So, there are some insurers that have performed incredibly well over the course of the year.”

In energy, as the demand for electrical power increases steadily, there are clear opportunities in the nuclear industry, Patel said.

“We see power consumption essentially compounding pretty much every year,” he said. “Analyzing the transition plans of the major economies, there was not really a viable plan that didn’t have nuclear power in it.”

Patel likes Saskatoon-based Cameco Corp., which operates uranium mines and has deep relationships with utilities and laser enrichment via Australia-based Silex Systems Limited.

“That is a really interesting way that we have played the nuclear power thematic for several years now. And that has been a quite successful story to us,” he said.

In the staples category, Patel’s watching publicly-traded supermarkets and retail chains that are outperforming the category — names like Bentonville, Ark.-headquartered Walmart Inc., Issaquah, Wash.-headquartered Costco Wholesale Corp., and Framington, Mass.-headquartered TJX Companies, Inc.

“We like to say, never bet against human innovation. And it’s humans that are creating new products, that are creating new services. That is what is driving these businesses.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.