Three strategies for finding returns in a volatile world

With global markets in a state of flux, investors may need to widen their approach to find returns, says Kathrin Forrest, an equity investment specialist with Capital Group.

She said looking for companies with solid fundamentals remains key. But analysis of each company should include its operating philosophy as well as macro and micro environments.

“You can look for companies that are focused on innovation and long-term structural growth opportunities. That could be one avenue to seek return,” she said. “Another one could be focused on companies that are recovering from their own mini-cycle or a mini-recession and that are now positioned well for cyclical upswing. And a third example could be companies that have a strong and sustainable commitment to returning cash to shareholders.”

Forrest said looking at those “differentiated sets of return” could help navigate an environment where recession is not yet off the table, and where technological and geopolitical forces are rapidly changing the investment landscape.

“I can see a broad range of potential outcomes from where we are today. To me that means focusing on fundamental bottom-up analysis,” she said, adding that economic data has been mixed of late, allowing investors to interpret it in a variety of ways.

On the positive side, North American consumer spending remains strong despite rate hikes, thanks to strong labour markets. And inflation has been slowing, edging nearer the targets of both the U.S. Federal Reserve and the Bank of Canada.

On the other hand, the yield curve remains inverted, historically a reliable indicator of a pending recession. Money supply aggregates are also levelling off, and banks are tightening credit and lending standards.

She said the odds of a recession could diminish with time because companies and consumers can moderate their behaviour.

“But in the end, the odds of a recession are not completely zero, and we might see one toward the end of this year,” she said. “Regardless of whether we see one or not, we could see a strong recovery coming out of this.”

Forrest said the fund seeks companies with strong competitive positions, resilient end markets, solid balance sheets, and sound capital allocation.

“Macro factors are important. But they can be deceiving too,” she said. “We look for unique insights at a company level. And we do that with the long-term time horizon, incorporating different perspectives.”

Among the industries that the Capital Group team likes are pharmaceuticals, which is seeing tech-fuelled advances, and industrials, which is benefiting from the global energy transition. Both sectors feature companies with pricing power, sticky demand and strong pipeline opportunities to generate long-term structural growth.

“One example specifically within pharma is the medical treatment of obesity,” she said. “And one company that we like here in particular is [Denmark-based] Novo Nordisk.”

In the industrials sector, she likes Texas-based Caterpillar Inc.

“Caterpillar has strong market share and strong customer relationships through on-site collaboration, and it also has a sticky aftermarket business,” she said.

Forrest advocates applying a longer-term time horizon to investment decisions.

“And along the way, be ready for some volatility,” she said, “because it’s probably not going to be a straight path ahead.”

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