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Wellington Management Hong Kong Ltd
17/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong

Formula one race

Driving growth with quality controls in uncertain markets

John Boselli, CFA, Equity Portfolio Manager
Philip Brooks, CFA, Investment Director
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

Contrary to what some observers might think, US equities may offer growth potential in 2022 and beyond. How and where can investors find “quality-driven” growth?

At a glance

  • Investors may still be able to find growth opportunities in US equities, despite ongoing interest-rate hikes and market volatility.
  • Companies most likely to be long-term winners possess three core attributes: 1) strong fundamentals; 2) “future-proof” products; and 3) quality, sustainable business models.
  • We believe active portfolio management remains essential in an unpredictable and fast-moving market environment.

Amid geopolitical tensions, rising interest rates, and persistently high inflation through the first nine months of the year, any investor optimism that existed at the start of 2022 soon gave way to worries about numerous — and growing — economic and investment risks.

Yet despite global market volatility and uncertainty, we believe US growth remains relatively resilient. As we commented recently: “US growth remains consistently high given relative stability, US energy security, high-functioning private and venture capital markets, technology advances, and demographics.”

Using market history as a guide, our outlook for US equities is generally positive, even after the interest-rate hikes enacted by the US Federal Reserve (Fed) and other global central banks in recent months: “Over the past 40 years, the first Fed rate hike of a given cycle has typically resulted in negative S&P 500 returns in the short term — but often followed by a rebound into positive territory within one year1.”

Some investors have expressed concern that equities may be overvalued these days. However, many US companies offer high levels of free-cash-flow generation versus those in other markets. With much of this cash being returned to shareholders via dividend payouts and stock buybacks, otherwise referred to as ”shareholder value creation,” we don’t view US equities to be as expensive as many other global markets.

The vast array of companies in the US equity universe can make it challenging to identify potential long-term winners. To do so, we consider several key attributes:

  • Strong corporate fundamentals
  • Future-proof industry sectors
  • Quality, sustainable business models

A large domestic footprint

The US economy ultimately recovered strongly from the 2008 global financial crisis. In turn, such economic vitality has translated into widespread corporate financial strength. Continued improvement in US company fundamentals over the past 15 years has driven up many domestic share prices. And, over the past decade, the US stock market has outperformed broader global equities (Figure 1).

Figure 1

Our take on the current US economic landscape: “We believe that inflation has peaked for the current cycle, with forward indicators now having rolled over. This may offer some reprieve to the broader US economy, creating a base from which it can potentially continue to grow — albeit at a slower pace over the past few months, and with some volatility.”

Sectors defining tomorrow’s world

Many of the industries shaping our lives personally and professionally emanated originally from the US. For example, the rapid, multiyear digital transformation across almost all global sectors is largely a byproduct of the country’s generous spending on research and development (R&D).

Last year, US R&D outlays topped 3% of national GDP (Figure 2) — at the time of writing, the highest on record2. And while R&D expenditures by several other nations are comparable, many US companies are now reaping the rewards of decades of forward-thinking investment in this area.

We believe there are many potential winners from this: “These range from pharmaceutical companies with competitive advantages driven by innovation and patents, to data analytics and information services providers that quicken and improve decisions, to social media and entertainment companies that benefit from growing preferences for online connectivity and access.”

Figure 2

We expect three technology-driven trends to dominate the next decade:

  • Reliance on e-commerce: Accelerated by COVID-induced economic lockdowns, we believe large swathes of the US population will likely stick with online shopping activity in the coming years, despite the reopening of many physical stores throughout the country. 
  • Digital payments to flourish: A combination of online shopping and greater convenience will reduce the use of cash, which still accounts for almost 20% of all payments made in the US3 and over 50% across most of the world4. US payments companies and other diversified financials players are increasingly taking market share from traditional banks. Other types of businesses benefiting from this trend include investment managers, broker dealers, and fintech companies. 
  • Work-from-home measures here to stay: As many employers instill "hybrid” working models, service providers that can help digitalize conventional brick-and-mortar businesses will stand to gain, such as IT services companies and digital marketing firms.

Quality and sustainable businesses

We believe having quality equity investments should always be a component of any long-term portfolio, but especially in today’s volatile, uncertain market environment: “Selecting high-quality stocks can potentially help reduce market downside exposure.”

Some key features of quality companies that can make them attractive to investors, particularly in times of market stress, include:

  • They generally have cleaner, more robust balance sheets and healthy, steady free-cash-flow streams.
  • They will often continue returning capital to shareholders, which may enhance their appeal to investors.
  • Many are more sustainable, “ESG-friendly” companies that tend to have lower costs of doing business.

Active portfolio management is key 

Against the backdrop of today’s volatile market environment, filled with fast-moving, unpredictable, and emerging trends and companies, we believe skilled, active portfolio management might better enable investors to focus on quality growth companies that can aid in the pursuit of long-term capital returns in a risk-managed way.


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