TOL - 8th May, 2023
The type of stocks to buy to potentially avoid the market carnage
Epoch Investment Partners outline the factors they believe will drive equity returns in 2023.
As John Tobin, managing director and portfolio manager at Epoch Investment Partners, puts it, “2022 was something of an inflection point”.
He makes this comment when considering the extraordinary monetary policy accommodation that was afforded by central banks post-the GFC and through the pandemic, and the subsequent hiking cycle central banks have undertaken.
Fellow portfolio manager, Kera Van Valen adds that it is this almost universal hiking of rates that will continue to feed volatility in markets:
We're leaving an ultra-accommodative policy stance from central bankers around the world, and interest rates are rising.
Interest rates are likely to remain higher, and therefore we would expect more volatility to continue in 2023.
Despite the expectations of volatility, both Van Valen and Tobin believe the global equity shareholder yield strategy could thrive in such an environment.
That's because, as Tobin notes, fundamentals are back in favour as compared to the multiple expansion, which previously drove equity returns and was attributed to ridiculously low interest rates.
Moving forward, "the drivers of equity returns are likely to be earnings, growth, and dividends and shareholder distributions more broadly, rather than multiple expansion", adds Tobin.
In this edition of Expert Insights, I explore this line of thinking with Tobin and Van Valen, as well as the major themes they are debating right now, and what types of opportunities they are likely to pursue over the next 12 months.
Please note: This interview took place on 9 March 2023.
Edited Transcript
Following such a volatile year, what should investors expect in 2023?
Kera Van Valen: 2023 is likely to be another volatile year. There is no shortage of uncertainty. We have geopolitical risks, whether it be the war within Ukraine, the tensions between the US and China, that are likely to continue to drive de-globalisation and impact global growth.
In addition, we're going through policy normalisation.
We're leaving an ultra-accommodative policy stance from central bankers around the world, and interest rates are rising.
While the risk of a recession remains elevated, it might have come down slightly with some of the deceleration in inflation, but it's still there and unlikely to drive a policy pivot. Interest rates are likely to remain higher, and therefore we would expect more volatility to continue in 2023.
What longer-term impacts do you expect could arise from the rampant inflation and subsequent aggressive monetary tightening that defined 2022?
John Tobin: In our view, 2022 was something of an inflection point. If you take a step back and you think about really the past 10 years from the global financial crisis through the global pandemic, that really was a period of extraordinary monetary accommodation.
We had central banks around the world with zero interest rate targets, negative interest rate targets, massive quantitative easing programs, massive fiscal stimulus programs. Those were all in response to these two really extraordinary events, the global financial crisis and then the global pandemic.
With those behind us, we think that the central banks put that playbook back on the shelf.
As a result, we're in an environment where interest rates are likely to stay at a more elevated level. The new normal is more like the old normal in a way. Not only are central banks now fighting inflation, but they're also normalising policy.
One of the consequences of the really low interest rate policies that were in place for many years, is that they inflated multiples - they were a big driver of equity returns.
We saw in the past few years, up until 2022, one of the biggest drivers of equity returns was multiple expansion, attributed to ridiculously or unnaturally low interest rates.
If that's behind us, then the drivers of equity returns are likely to be earnings growth, and dividends and shareholder distributions more broadly, rather than multiple expansion.
If that's the case, this should be an environment that is one where our focus on identifying companies based upon these fundamental characteristics, it should play well to our strength, that it should be an environment where this is a strategy that does well.
What are the major market themes you are debating right now?
Kera Van Valen: The market has certainly been quite reactive to central bank moves and the policy normalisation that we're going through.
We have a lot of debates on whether we will go into recession. Is the Fed going to be able to pull off a soft landing? What is the long-term impact going to be for global growth?
These are what we're concerned about right now. We do think that, ultimately, companies will be able to navigate a recession, even if we have it. So, we're quite excited but feel it's important to have a more defensive stance in a market with such uncertainty.
If your base case comes to fruition, what are the opportunities you will pursue over the coming 12 months?
John Tobin: The base case, as I said, is policy normalisation, higher interest rates, an environment where the drivers of equity returns are earnings growth and dividends, rather than multiple expansions.
The opportunities that we'll seek are the ones that we always seek.
We'll do what we've always done: try to identify companies that have these cash flow characteristics, businesses that are growing cash flow, and businesses that are following good capital allocation practices and policies.
In doing that, in an environment that is a more fundamentally driven environment, it should be an environment in which the strategy does well, both on an absolute basis and on a relative basis.
About Epoch Investment Partners
New York-based Epoch Investment Partners, Inc. (Epoch) was established in 2004. Its distinct investment philosophy based on the generation and allocation of free cash flow and integrated portfolio risk management differentiates Epoch from other global managers. Click here to find out more about their investment philosophy.
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The information contained herein is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information is distributed with the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein as well as any risks associated with such proposal or services. Nothing in this presentation constitutes legal, tax, or accounting advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Certain information provided herein is based on third-party sources, and although believed to be accurate, has not been independently verified. Except as otherwise specified herein, TD Epoch is the source of all information contained in this document. TD Epoch assumes no liability for errors and omissions in the information contained herein. TD Epoch believes the information contained herein is accurate as of the date produced and submitted, but is subject to change. No assurance is made as to its continued accuracy after such date and TD Epoch has no obligation to any recipient of this document to update any of the information provided herein.
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To the extent the material presented contains information about specific companies or securities including whether they are profitable or not, they are being provided as a means of illustrating our investment thesis. Each security discussed has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. Past references to specific companies or securities are not a complete list of securities selected for clients and not all securities selected for clients in the past year were profitable. The securities discussed herein may not represent an entire portfolio and in the aggregate may only represent a small percentage of a clients holdings. Clients’ portfolios are actively managed and securities discussed may or may not be held in such portfolios at any given time.
Projected or Targeted Performance: Any projections, targets, or estimates in this presentation are forward-looking statements and are based on TD Epoch’s research, analysis, and its capital markets assumptions. There can be no assurances that such projections, targets, or estimates will occur and the actual results may be materially different. Additional information about capital markets assumptions is available upon request. Other events which were not taken into account in formulating such projections, targets, or estimates may occur and may significantly affect the returns or performance of any accounts and/or funds managed by TD Epoch.
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My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...
Expertise
My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...
Expertise
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