Sector-by-sector: What to watch in global equities this year

In a special podcast episode to round out 2022, we went ‘around the grounds’ within the Antipodes investment team to get sector-specific outlooks for 2023.

I spoke with the following team members on their sectors of focus:

• Graham Hay on Hardware, Industrials and Commodities (01:00)
• Beth Everett on Healthcare (09:10)
• Sunny Bangia on Domestic Asia and Emerging Markets (15:20)
• James Rodda on Domestic Developed Markets (21:30)

You can listen to the full episode here, or keep reading for the quick-take delivered by each. 

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Hardware, Industrials and Commodities (Graham Hay)

The most significant development to watch in 2023

"Increasingly policy is playing as signifiant a role as the macro," says Graham. 

He points to the $370 billion of energy security and climate investment within the Inflation Reduction Act, along with the Chips Act in the US. While Europe has its own policy settings established to meet the region's lofty decarbonisation ambitions.

The interplay of policy and macro in 2023, as we move into a slowing global economy, will be a major factor for investors to consider.

A stock to watch

Within Hardware, Industrials and Commodities, Antipodes' stock to watch is French integrated energy and petroleum company TotalEnergies (EPA: TTE).

Here's part of what Graham says on the podcast about TotalEnergies. 

"The company, we think, has one of the best track records of delivering consistent profits in the market. A lot of the European majors were cutting dividends at the bottom of the last cycle, Total was one of the few companies that was able to sustain its profits. 

"They've taken a long-term view on their industry and invested accordingly and that's allowed them to build a very high-quality upstream portfolio. But increasingly they're complimenting that with smart renewable investments across solar and wind, so they're building a much more diverse energy portfolio than they have historically."

A stock or part of the market to avoid

"I think investors should generally be wary of sectors that attracted too much capital, and/or whose business models were premised on the idea that the cost of finance was zero, the cost of materials and energy was close to zero and that you could subside customer acquisition by selling products for less than their cost," says Graham  

What are some examples of this? 

We're looking with caution at the likes of new entrants in the EV space, and some parts of the e-commerce and consumer technology sectors.

Healthcare (Beth Everett)

The most significant development to watch in 2023

Beth also points to the Inflation Reduction Act in the US as something to watch closely. 

For the Healthcare sector, the Act could have a significant impact on drug price negotiation. 

"At the start of September (2023) the first ten drugs to be subject to the negotiated prices will be announced. That's followed by an undefined price negotiation process that will last nearly a year before they publish the final prices," says Beth.

"A key question for us is really how the negotiation will work in a practical sense and what principles might actually be used to set the price. The legislation defines only a price ceiling which is a minimum 25% discount, but the actual negotiated prices could be much lower."

So, it's clear this legislation could have a very material impact on the value a company can generate from developing and commercialising drugs. One to watch very closely for the Healthcare sector. 

A stock to watch

French pharmaceutical and healthcare giant Sanofi (EPA: SAN) is one of Antipodes' top picks in the Healthcare sector for 2023.

Here's part of what Beth had to say:

"We continue to see large pharmaceuticals as defensive, given the macro uncertainty and Sanofi is well positioned to outperform, given it currently trades at a 40% discount to peers. 

"The management team has really consistently executed on initiatives to simplify the business - reducing costs and expanding margins."

In the episode, Beth goes on to discuss some of the key upcoming potential price catalysts for Sanofi. 

A stock or part of the market to avoid

We think it's companies with weak business models in more discretionary parts of healthcare.

This includes areas that are not medically necessary such as cosmetic therapies and surgeries, cosmetic dentistry, along with companies specialising in non-critical medical procedures that can be deferred. 

A stock example provided in the episode is orthodontics equipment manufacturer Align Technologies (NASDAQ: ALGN).

Domestic Asia and Emerging Markets (Sunny Bangia)

The most significant development to watch in 2023

“It will be the anticipated reopening of the Chinese economy,” says Sunny

China is the second largest economy in the world, so this reopening can't be ignored. We think this will be significant not just for the Chinese domestic market but also the rest of the world. 

Even here in Australia, there will be implications.

A stock to watch

In the Domestic Asia and Emerging Markets part our portfolios, Sunny calls out Chinese baijiu business Wuliangye (SHE: 000858).

“We have to think about the reopening of the Chinese economy and what that really means," he says. 

Social interactions will come back – going to entertainment functions, sporting events and celebrating holidays and with that I think an interesting point will be what happens to businesses that are exposed to that part of the market.

“It (Wuliangye) is the second largest baijiu, white spirits maker, in China. This is a high quality, very strong structural growth business that has seen two years of earnings downgrades as the economy has effectively been in shutdown mode.

“80 – 85% of all baijiu consumption happens in social gatherings, for example Chinese New Year, and other Chinese holiday periods. So there is a lot of pent up demand, we think, that’s on the horizon when the economy reopens.

“The business is priced at about 18 times earnings. So it’s around a 15% – 20% discount to global spirits businesses,” says Sunny

A stock or part of the market to avoid

While Antipodes still thinks India is attractive on a multi-year view, we think it's become expensive, and over the next 12 months it could be a source of funding for other interesting opportunities.

Here's some of what Sunny had to say on this:

“With the headwinds of China, there have been tailwinds in other parts of EM, and notably in terms of investor preference. Markets like India have been hugely in focus. The domestic market has bounced back, foreign investors have flocked to that part of the market, re-rating India to now pretty high levels relative to the rest of emerging markets, and also relative to the rest of the world."

Domestic Developed Markets (James Rodda)

The most significant development to watch in 2023

Among the developments to watch, James says more regulation on US banks could be one the "big stories" of the year. 

“There hasn’t really been a lot of market focus here, but the regulators are making a lot of noise talking about capital requirement increases. On the work we've done those changes could mean some of the US banks are actually short capital, and at a minimum they don' have any excess... So, I think that is an area to watch."

He also explains why investors should keep an eye on the industry cycle in software and consumer trends across the major economic blocs. 

A stock to watch

At Antipodes, we're of the view that European Banks could be in a sweet spot moving into 2023.

In the episode, James named Italian bank, UniCredit (BIT: UCG) as a stock to watch.

“Unicredit is particularly high in terms of excess capital, it’s about 33% of the share price. The CEO is very keen to return all of that as soon as possible," he says.

“It’s got a very, very low risk lending book... And 80% of deposits are funded by consumers. So it doesn’t have the pressure with interest rates rising, in terms of lifting funding costs. It’s at a very attractive starting point in terms of earnings return."

A stock or part of the market to avoid

Multiples in the US are still very high on a cyclically adjusted PE. This doesn't bode well for the the risk/return equation for investors exposed to the consumer - particularly in the highly discretionary part of the market.

“If you look at a lot of these discretionary retailers, product manufacturers, all those types of businesses, their earnings levels remain significantly above COVID. A lot of that has been due to supply/demand mismatch. If we return to a normal environment – and then we add in perhaps a recession, where earnings go below trend - you can see the potential for some bad outcomes,” says James.

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