A squeeze on corporate profits has many investors nervously eyeing this year’s earning seasons, with talk of an earnings recession commanding headlines.
But diligent money managers who keep a firm eye on revenue visibility and a focus on company-specific growth drivers will withstand the slowing of global economic growth.
“Growth is certainly becoming more scarce,” says Brent Puff, senior portfolio manager of the Zurich Investments Global Growth Share Fund and Concentrated Global Growth Fund.
“As such the opportunity set shrinks a bit, but there are many companies serving markets with very favourable growth dynamics. We think they can and will be successful even if economic activity decelerates,” Puff says.
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Globally, the picture is uncertain; markets are looking for stabilisation in China, trade tensions still simmer across borders, a potentially chaotic Brexit and lower commodity prices are set to keep volatility higher for a good while yet.
The impact of the United States tax reform is fully digested and the economic cycle is heading into its late stages. As such, whether price hikes can be passed on are likely to differ on a company-by-company basis.
But the investment team at Zurich Investments Global Growth has scouted for ideas across the world and have come up with some investment opportunities they expect will resist the uncertain and overwhelming forces dominating headlines.
CREDIT PENETRATION IN EMERGING MARKETS
One such investment idea revolves around credit penetration in emerging markets.
Credit penetration refers to the number of private lenders offering loans to a population, whether they be secured loans for things like houses and cars, or unsecured loans, like credit cards and personal loans.
The by-product of low penetration – where it’s difficult for people to get lines of credit – tends to be sustainably high volumes in the banking system. That, coupled with a relatively consolidated market structure, results in less competition, high returns and some fine opportunities in the banking sectors.
“In those low credit penetration circumstances, we’ve found you can find some pretty attractive banks in emerging markets,” Puff says. “We think those dynamics are in play in many emerging markets and as such, we own several,” he says.
Indonesia is one such market where there is low credit penetration and a high growth industry structure. Peru is another, as is Mexico, though Puff points out the change in political leadership has potential to put pressure on banking fees across the system.
Another market that has piqued the team’s interest is India, where private sector banks should continue to gain market share as the public sector banking system struggles with high levels of nonperforming loans.
“The Indian public sector banks tend to be quite capital constrained, meaning they struggle to grow in a market where credit penetration is low,” Puff explains.
“The private sector banks are better capitalised, better run and don’t have the same challenge of non performing loans.”
THE PAYMENTS OPPORTUNITY
The domination of digital payments, credit and debit over cash and cheques continues.
And while this is a well-documented investment idea, the Zurich Investments Global Growth team believes alternatives to cash payments will ultimately serve investors well as a secular, rather than a cyclical, growth play.
“There is still a long runway for these businesses to sustain volumes of payments across these global networks,” Puff says.
For the world on average, credit and cheques are still about 50 per cent of payment volumes, and even though certain developed markets may have higher penetrations of credit and debit platforms, the team is certain the trend has plenty of room left.
Visa and Mastercard, the most ingrained payment networks in the world, are still enjoying high single digit and low double digit growth rates organically.
PayPal, with its business model much more firmly online than Visa and Mastercard, is enjoying growth in the mid-20s, which Puff says isn’t likely to come up against drastic redirection any time soon.
“They’re very well positioned to continue to benefit from this shift of commerce online; cash and cheque will be marginalised and PayPal is a direct beneficiary of that.”
One of the team’s investments, WorldPay, is enjoying a rocketing share price after the announcement of a $US43 billion merger with FIS, a financial technology company that provides software for payment processing from mid-March.
WorldPay is a merchant acquirer that develops technology underpinning credit card and other transactions for e-commerce merchants.
The market had only just digested the 2018 merger between US-based Vantiv, a credit card processing company, and UK-based WorldPay, which saw the combined entity move decisively towards online payments.
“Higher structural organic revenue growth is the result,” Puff says. “Payments is a very attractive end-market, a market that is unlikely to be materially impacted if GDP growth slows down.”
One payments company piquing the interest of global investors has been Amsterdam-based Adyen, which facilitates payments, through e-commerce sites, mobile and point-of-sale systems.
The Adyen platform acts as a payment gateway, payment service provider and has risk management facilities.
“We have looked at it, but the challenge is in the risk reward profile,” Puff says. “There are very high embedded expectations with Adyen and a very challenging valuation, and as such we think there’s much better risk reward opportunities in the names we own like Visa, Mastercard, Paypal and WorldPay.”
MUST HAVE REVENUE VISIBILITY
As investors find themselves in a world where growth is slowing, and the tailwind in economic activity is spreading across most markets, revenue visibility remains one of the most important investment factors.
“There is no question that revenue visibility and business model visibility are the most important elements for investors,” Puff says.
Portfolio managers are searching for resilient opportunities, those that can withstand the slowdown in global growth and keeping an eye on where and how the money is coming in will ultimately reward patient investors.
“That headwind is starting to push harder now than it has in the last couple of years and revenue visibility, which is always important, is arguably now more important,” Puff says.
Another example of resilient growth businesses with visible future revenue streams are wireless tower companies.
“Those businesses have contracts set for five to seven years, they have annual price escalators built in to them and we can see clearly their growth potential,” Puff says, adding that American Tower is one name in the portfolio.
“The firm contracts offer higher than average revenue visibility as well as important drivers of incremental growth.”
The wireless world is going to move from a 3G and 4G world to a 5G world, Puff says, which is sorely needed in parts of the developed economies.
That said, Puff will avoid the carriers of the networks, which have very capital-intensive businesses and wireless penetration is fairly complete in many global geographies.