Global opportunities amid shifting trends in US economy

Over the past two years, the US economy has been incredibly resilient buoyed by significant government spending and an employed, spendthrift consumer. As the current reporting season comes to an end, we continue to assess carefully if this resilience is continuing. With WAM Global’s (ASX: WGB) comprehensive, nimble and on-the-ground approach to stock picking, we believe the current environment provides us with a number of exciting investment opportunities in companies that can benefit across a range of economic outcomes with a catalyst to drive share price rerating.

Labour hoarding

In the US, faced with the tightest job market in decades combined with a period of heightened attrition known as ‘the Great Resignation’, many employers were conditioned to avoid making layoffs. This phenomenon is known as labour hoarding, where, out of a scarcity mindset, businesses keep more workers on their payroll than they strictly need. If growth starts to weaken, at some stage the need for businesses to support margins will outweigh the attraction of labour hoarding, and firms will restructure. Whilst not widespread at this point we do see evidence of some job cuts at certain technology companies, banks, construction and retail companies. If those cuts spread more widely, that will feed into consumer demand and sentiment, which drives 70% of the US economy.

Too optimistic on interest rate cuts

Despite the US economy’s resilience to this point, market participants have at times taken the view that the US Federal Reserve would cut rates early and often. Our view has been that this was an unreasonable base-case for investors to assume amidst such economic strength and continued above-target inflation.

In an environment of potentially softening consumer demand with elevated interest rates, the quality of the people managing each business, including their ability to manage the cost base whilst maintaining key investments, will play a large role in determining if that company outperforms or underperforms. Meeting with and rating management quality is an integral part of WAM Global’s investment process, and in this macroeconomic climate, this step is more important than ever. We engage with, provide counsel to, and support management teams that are prudently managing their businesses through this uncertain environment.

We are also alert to red flags. We see a number of management teams looking to offset slowing growth with questionable acquisitions. Investors should take a clinical approach to evaluating whether proposed deals are a good strategic fit at an appropriate price, or are simply a way of bolstering revenues.

The current economic conditions could change quickly, further reinforcing the importance of staying close to management teams and ensuring they continue to navigate both their operational and capital allocation duties well.

A stock pickers’ market

In environments such as these, individual stock selection remains key, and we remain disciplined in our approach of buying undervalued growth companies with a catalyst to unlock value.

We see significant tailwinds for technology stocks, including those able to benefit from Artificial Intelligence (AI). We own several AI winners including Intuit (NASDAQ: INTU); a tax software and accounting provider, that has unique data, strong distribution and clear opportunities for AI co-pilots, and SAP (NYSE: SAP); an enterprise software developer that is delivering valuable AI-driven insights and automating tasks utilising valuable company and sector data. We own Booz Allen Hamilton (NYSE: BAH), a clear leader in its ability to provide AI solutions to the US government. 

While the more well-known AI winners are achieving impressive results, we believe investors will also benefit from AI investments amongst less well-known winners like those highlighted above. In many cases, these less well-known winners have less demanding valuations and yet still enjoy strong tailwinds to drive their earnings trajectory.

In Europe, we own various high-quality market leaders which are well-placed to grow over the long term. One such example is the German equivalent of Australia’s Ticketek, a company called CTS Eventim (ETR: EVD). CTS Eventim operates in the ticketing and live entertainment sector and is the leading player in Germany, Italy, Switzerland and Austria with a significant market share in each country. The company has consistently delivered double-digit earnings growth over the past 15 years and we believe it will continue to deliver solid earnings growth ahead of the market’s expectations as it adds new verticals and consumers buy more tickets online. Online sales attract a higher margin than physical sales.

Recent results from Intuit, SAP, Booz Allen and CTS Eventim, as well as other investments in the fund, exceeded expectations and reinforced our view that being selective in which companies to hold and invest in is critical. We are excited by the resilient growth being experienced by these high-quality companies and still see significant upside to valuations as they execute on their potential.