3 key concerns for the remainder of 2022 (and the stocks that could outperform because of them)

There's been enough volatility in the first few months of 2022 for investors to chuck a hissy fit. After all, macroeconomic headwinds such as supply chain chaos, inflation, rising rates, a war in Eastern Europe, as well as an upcoming local election down under, have seen markets take investors on a wild rollercoaster ride that no one signed up for. 

And while Firetrail's Anthony Doyle believes that its best investors avoid the noise, there are still three key concerns that are on his radar for the remainder of 2022. In fact, he says these very concerns that are causing investors to check their portfolios on the daily, are also troubling the companies in his portfolio as well. 

In this Expert Insights video, he outlines four companies the Firetrail S3 Global Opportunities Fund is exploiting to benefit from three of these key concerns, including supply chain constraints, higher interest rates, and skyrocketing commodity prices. 

Plus, he also shares one key piece of advice for investors to help them navigate this volatile period. 

Note: This interview took place on Wednesday, April 13th 2022. You can watch the video or read an edited transcript below. 

Edited Transcript 

Why has 2022 been so difficult for investors? 

Anthony Doyle: So 2022 has been certainly a difficult time for global equity investors, but of course also for fixed income markets. There are a couple of reasons why, whether it's rising inflation, hawkish central banks or rising commodity prices, particularly fueled by the Russian invasion of Ukraine. So investors at the moment are nervous, as indicated by an inverted yield curve. 

Concerns about a global growth slowdown and recession have been building. But of course, these macroeconomic factors and variables are extremely difficult to forecast. 

In the short term, there are growing concerns, but longer-term investors would do well to focus on bottom-up fundamentals and the real things that matter for the companies within their global equity portfolios. 

Well, at Firetrail, we think it's extremely difficult to forecast macroeconomic variables. I mean, I've got 15 years of experience on global macro desks, and I know it is absolutely one of the most difficult things you can do. Whether it's trying to forecast a recession, move from risk exposure into cash or time style rotations or sector exposures, it's very, very difficult to do. 

So rather than try and forecast macroeconomic top-down factors, we focus on what matters for companies from the bottom up. So every company that we research, there are over 200 hours of work that goes into analysing companies as potential candidates for one of our portfolios, including the Firetrail Global S3 Opportunities Fund.

So when you say, "What are we focusing on at the moment?" It's very much talking to companies and understanding what they see as the key risks. 

They are continuing to highlight to us supply constraints, getting those raw inputs into their manufacturing processes, to produce final products for industrial companies. They're talking about higher interest rates. They're talking about higher commodity prices. 

So many of the concerns that Australian investors and global equity investors have are being reflected from the bottom up for what matters for companies, particularly the companies that we speak to.

So we invest globally and our universe is 20,000 companies. So we go from 20,000 companies via quantitative screening, deep fundamental analysis, and over 200 hours of analysis on every company that our analysts research to only 30 to 40 of our best ideas. Those best ideas, being a concentrated portfolio are very, very different to the index. A very, very low overlap in holdings relative to the index and other funds such as passive funds or global equity funds. We're finding opportunities across sectors, regions, and thematics.

So when you look at our portfolio, it's very, very well diversified by companies, but also by some of those themes that I've spoken about before. 

A company for rising commodity prices 

So we have a copper miner named Antofagasta (LON: ANTO) based in Chile. This is a company that's benefiting from the increase in copper prices and of course, copper is a key resource in that decarbonisation theme. 

Copper is used in EVs, it's used in wind farms, and it's used in a lot of the solutions that the world will require in order to have net carbon zero emissions by 2050.

Now what's great about Antofagasta is they have great local relationships. They are investing heavily in desalination plants in order for their operations to use seawater rather than freshwater, for example. It's a company that is committed to sustainability and wants to be 100% renewable-sourced for its mining operations in the future.

Two companies for supply chain constraints

In terms of supply chain constraints, I'm sure you've heard about the new oil - semiconductors. It's discussed in many, many pieces of literature, including on Livewire. So we have exposure to semiconductors and our companies within our portfolio are reporting very, very strong increases in revenue year on year. So one company that is probably familiar to Livewire readers and viewers is Taiwan Semiconductor (NYSE: TSM). 

I should mention as well, that if you want exposure to semiconductors, you really have to look globally. Semiconductors are in everything. They're in coffee machines, they're in EVs, they're in computers, they're in mobile phones, a plethora of uses in final products and beyond.

We also own Micron Technology (NASDAQ: MU). They produce chips. The average EV has $750 of memory chips within it and Micron Technology has been a strong contributor to the Firetrail S3 Global Opportunities Fund since its inception. The result of very, very strong demand for memory chips for AI and cloud computing, for example.

A company for rising rates

So one company that we have exposure to because of rising rate concerns and the potential for a more hawkish central bank stance from Western central banks, in particular, is a U.S. insurer, Chubb Insurance (NYSE: CB), which will benefit in the environment of steepening yield curves and pushing through higher policy rates through their insurance premiums.

I think what we focus on at Firetrail is a profile of being an investor rather than a speculator. So it's very, very easy to be caught up in the noise of day to day material, whether it's via social media or news outlets. When you consider behaviorally what we are attracted to, it's bad news. 

There's a reason that newspapers don't lead with good news every day, because they won't sell many newspapers. So when you recognise that the world is operating to try and shake you out of your core convictions and potentially make a bad error when it comes to investing, it can really assist you in potentially reframing what you are trying to achieve in investment.

So what we do at Firetrail, is we take a medium to long term approach, a five-year sort of investment time horizon. We also focus bottom-up, fundamentally on what matters. Cast your minds back to March 2020, as recently as the pandemic. A lot of people turning to cash missed out on the fantastic run in risk markets since as central banks and governments sought to support their economies through a lockdown type scenario.

Now, what's great since I've returned to Australia and the many conversations that I've had with financial advisors and institutional clients, is that during that most volatile sell-off, that time during March 2020, a lot of investors were looking to put money to work rather than sell their holdings and retreat into cash. 

We think that timing is almost impossible to do. We think moving out of risk assets and into cash is extremely difficult. 

So we're fully invested throughout the cycle, we have a long term time horizon, and the great news for investors is if you take that long term investment time horizon, there's a very, very high probability and a good chance that you are going to have a positive performance profile. The longer you extend your time horizon, the better your odds are. So think about being an investor and not a speculator, that would be the positive message I would give.

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The Firetrail S3 Global Opportunities Fund is a concentrated portfolio (approximately 30 companies) of Firetrail’s best global equity ideas. The investment process employs fundamental analysis to identify the most attractive investment opportunities with sustainable characteristics. Click here to find out more.