An unprecedented level of disruption has created compelling investment opportunities for those who know where to look, note Portfolio Managers Jeremiah Buckley and Marc Pinto.  

How to spend it

The pace of change today has never been greater and disruption is being felt across industries and geographies. While presenting risks, this has also unearthed new and exciting opportunities.

For both equities and fixed income, we are keen on a few themes such as the uptick in global travel, the transition to cloud computing and the rise of Software as a Service, for example.

We talked a lot about the growth in global travel over time, which we continue to believe is an attractive area of opportunity, as consumers all over the world continue to travel, especially in Asia. The International Air Transport Association revealed last December that present trends in air transport suggest passenger doubling to 8.2 billion in 2037, with China, India, Indonesia and Thailand among the top 5 fastest growing aviation markets.

We also believe the transition to cloud continues to be a very economical move for enterprise applications. A February 2019 update to the International Data Corporation’s (IDC) Worldwide Semiannual Public Cloud Services Spending Guide revealed worldwide spending on public cloud services and infrastructure is forecast to reach US$210 billion in 2019, an increase of 23.8% over 2018. The market intelligence company predicted the market would reach a five-year compound annual growth rate (CAGR) of 22.5% with public cloud services spending reaching US$370 billion in 2022.

So we believe that the economics that the cloud provides will continue to drive opportunities, and that is based both for the companies that are providing the cloud services, but also a lot of the equipment makers that are providing infrastructure, equipment that help facilitate the growth of the cloud.

Another area of opportunity continues to be Software as a Service, which continues to expand the total addressable market for companies that are offering subscription services.

Within fixed income, we anticipate range-bound rates and credit, but recognise bouts of volatility are likely. Diversification across fixed income asset classes and a conservative credit allocation is prudent, in our view. We will continue to seek attractively valued total return opportunities, but expect carry to drive returns going forward. We remain focused on our highest-conviction names, favouring defensive business models with the potential to generate consistent free cash flow, even if a downturn unfolds.

The upcoming 2020 presidential elections are likely to introduce fresh populist rhetoric and new economic uncertainties. Meanwhile, U.S.-China trade relations remain in limbo.

Risks

Global trade tensions, today, remain one of the biggest risks to equities. Persistent trade uncertainty may cause companies to pare capital spending. Obviously, trade wars are not good for the global economy and trade flows and economic flows. Given the strong performance of equities year to date, we are mindful of a potential pause or giveback. Equities have been supported by low interest rates and renewed accommodation by the Federal Reserve, but the low-rate environment has been driven by concerns around slowing economic conditions and a general lack of inflation.

That is really the risk that keeps us up at night and we continue to analyse our exposure there. We would like to continue to see progress on a lot of the trade negotiations that are happening and getting to a resolution as soon as possible to give companies that confidence instead of that tentativeness that could disrupt that capital spending cycle.

For fixed income investors, the low interest rate environment has created a less market and generating alpha in this environment has proven challenging.

US-centred, for now

Overall, we have the flexibility to invest in non-US markets which we have done in certain time periods.  Regardless of domicile, our focus is always on multi-national companies.  We invest overseas when we feel the risk/reward on non-US domiciled companies offer a more attractive risk/reward than their US counterparts.  With the macro weakness in Europe, we find that growth companies in that region trade at a substantial premium due to their scarcity value.  Therefore, we are finding better US equivalent opportunities. For these companies, we are optimistic about free cash flow yields and dividend yields. The current dividend yield for the S&P500 is about 2%, which is attractive to shareholders. We think the normalised free cash flow yield is much higher than that, giving companies the flexibility to reinvest in their businesses, or think about rewarding investors. We are also seeing a very active level of buybacks, which we believe create value for shareholders.

Looking ahead

We believe there are some really attractive themes within equities and fixed income that we can take advantage of over the long term despite rapidly shifting trends and evolving habits and geopolitically driven events. We believe that through a detailed understanding of industries and business models, and through rigorous research, that investors can stay on the right side of change.

Unless otherwise indicated, the source for all data is Janus Henderson Investors, as of 31 May 2019.