With 25 years of global equity market investing under his belt, Ned Bell has witnessed his fair share of crises: the bursting of the dotcom bubble, the global financial crisis, the COVID-19 crash.
But with markets again bracing for the worst, as rising interest rates and slowing economic activity collide with record levels of global debt, Bell is wary of drawing parallels.
Ned Bell, chief investment officer and portfolio manager at Bell Asset Management. Eamon Gallagher
Although he thinks there are similarities between the early 2000s and today, Bell is on a buying spree, saying extreme volatility equals a “phenomenal opportunity for long-term investors in quality companies”.
“When there’s a market drawdown, a crisis, there’s always an investment bank – the canary in the coal mine,” he says.
“It’s usually Deutsche, but occasionally Credit Suisse comes from behind. With the volatility we’ve seen, particularly in the UK, it’s inevitable that some hedge fund or pension fund that’s going to blow up.
“But to be honest with you, I’m not of the view that there are a huge amount of corporate calamities on the horizon. Global corporates are actually in pretty good shape.”
Bell argues that markets today are struggling to price in change, which is triggering volatility; a dynamic he puts down to inexperience with a rising rate environment, as grey hair moves out of the industry. But he says there are reasons to be hopeful, noting early signs that inflation and the red-hot labour force may be cooling.
“Markets are mechanisms for pricing in what’s going to happen in the future, and this year has been the worst imaginable. It’s like we’ve had five years’ worth of bad news in one year,” he says.
“I think we’re getting to the point where inflation is starting to look better, and you’re starting to see a bit more weakness in the jobs market.
“I think the Fed will be looking at that and thinking the violent impact of numerous rate rises is starting to have the desired effect. And once the market starts to realise that maybe the Fed is moving into a period whereby they’ll be tapping the brakes, not slamming on the brakes, I think that could be a big trigger for a sharp rally.”
Bell’s comments come at a particularly nervous time in markets, swinging from crisis to relief rallies as the Federal Reserve commits to quashing decades-high inflation with aggressive tightening.
In the past two weeks, investors have witnessed turmoil in the UK bond market, highlighting the vulnerability of financial institutions which adopted risky strategies to boost their investment returns in a low-interest rate world. That was chased by rumours surrounding Swiss banking giant Credit Suisse as it embarks on an expensive restructuring.
The currency market response to the UK government’s planned tax cuts was brutal. AP
With blood in the streets, Bell is putting all his eggs in the quality basket; a factor that’s gained prominence as investors seek the perceived safety of lower-growth companies with steady returns, squeaky-clean balance sheets and limited degrees of earnings variability.
Research from broker Ausiex shows that the traded value of quality-related stocks and exchange-traded funds is up 13.5 per cent compared to last year. Investors are seeking ETFs such as the VanEck MSCI International Quality ETF and local names such as CSL, Woolworths and Macquarie.
Bell thinks now is the time to be actively placing bets, noting that in seven of the past 40 years in which the consumer price index has exceeded 4 per cent, premium stocks (measured by the MSCI Quality Index) have outperformed the broader market (MSCI World Index) by about 9 per cent.
“If you think about alpha generation over the next five years, a lot of the seeds will be sown now,” he says.
“We’ve highlighted about thirty names that we believe have got return on capital north of 15 per cent. They’ve grown revenue by at least 5 per cent per annum over the past five years, earnings by at least 10 per cent, and they’ve got a free cash flow yield north of 3 per cent.
“Names like Accenture, Alphabet, AmerisourceBergen, ASML, Home Depot – that’s been really sold off badly – Hoya in Japan, Lowe’s, LVMH, Mastercard, Microsoft, S&P Global, Texas Instruments. These are all pretty well-known, high-quality companies, but they’re all way down.”
Bell also calls out companies he thinks are “massively oversold”, down more than 30 per cent this year including Nike, Estee Lauder, Zoetis, Edwards Lifesciences, Moody’s and Cisco.
“There’s obviously earnings pressure across just about every company on the planet, but the question you’ve got to ask yourself is, how long-term is it?” he says.
“There’s been a perfect storm for margins across a lot of these businesses, but many of those issues will start to abate … That’s where you’ll start to see markets looking ahead and saying, ‘Things aren’t that bad’.
“Earnings expectations will come back but earnings themselves aren’t necessarily falling off a cliff, but the market is pricing that in.”
A few areas Bell won’t touch are energy and basic resources because of the absence of “franchise strength”, despite commodities reaching the highest prices in decades. He is also wary of traditional value stocks, saying companies have grown earnings by borrowing money and buying back shares, “hence, they’ve become more sensitive to interest rates”.
Miners are reaping more profits than every other non-financial industry combined, after the resources sector posted a record $81 billion quarterly profit in June on the back of sky-high commodity prices. Tamara Voninski
Preference lies in technology, healthcare and consumer names which can lean the portfolio towards growth, but Bell insists it doesn't chase companies after they’ve run.
Without exposure to energy, the strongest performing sector last year, how well has the strategy performed? Bell Global Equities had a strong 2021, clocking up a top ranking performance of 31.7 per cent, according to Morningstar. Overweight positions in healthcare and consumer cyclicals paid off, while big tech names buoyed performance.
This year has been tougher, returning negative 18.3 per cent and underperforming Morningstar’s global equity ex-Australia index. Bell admits he’s made some mistakes, namely underestimating the extent of the sell-off in consumer stocks, and being too early in small-to-mid cap global names.
“As much as we saw inflation coming, we also had the view that because consumers have effectively been locked down for two years, the balance sheets of consumer-facing companies would be in a very strong position, and they should therefore be able to absorb short-term inflationary pressures,” he says.
“We didn’t think it was going to be as bad as what the market is now implying.”
The son of the late Bell Financial Group founder and stockbroker Colin Bell, Ned Bell got his start in the finance industry in the late 1990s at Loomis Sayles in Washington DC. He got a taste of managing an international equity portfolio at the firm’s main office in Boston, before heading to San Francisco to experience the dotcom boom and bust from up close.
Bell joined global equities manager Bell Asset Management at a time when homegrown names such as Platinum were starting to make a name for themselves. Today, international equity funds are popping up all over the place as Aussie equity brands turn their attention offshore with mixed results.
Bell says the trend is being driven by consolidation in the superannuation industry, which is affecting the number of mandates available to Aussie equity managers. However, he says managers can get themselves into trouble if they underappreciate the nuances of specific geographies and management teams.
“German management teams are painfully conservative. Japanese teams even more conservative, whereas American teams are the opposite – bullish beyond belief,” he says.
“There are also industries we don’t have … big tech, consumer discretionary companies like LVMH and Hermes. There’s a lot of nuances that can be difficult to appreciate from an Australian perspective.”
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