Amid changing global macroeconomic trends, value-investing opportunities in financial services, healthcare and industrials emerge, per Eaton Vance portfolio managers.
Market volatility isn’t new. But today’s investors face an almost perfect storm, with geopolitical upheaval and the ongoing pandemic having altered everything from global peace post-WWII, supply chains for food and energy and monetary policy.
The downstream results, in part, are new macroeconomic trends that include rising interest rates, countries reopening their economies and shifting economic partnerships. In this environment, financial services, healthcare and industrials may offer investment opportunity, say Aaron Dunn and Brad Galko, Co-Heads of the Value team at Eaton Vance, part of Morgan Stanley Investment Management.
“Many investors in today’s market have never experienced inflation and interest rates meaningfully above zero,” and rising rates could benefit financial companies, Dunn says. With “healthcare innovation at the forefront for governments” post-pandemic, Galko adds, medical technology and pharmaceutical companies stand to benefit. Lastly, Russia’s war with Ukraine has redefined political partnerships, a tailwind for commodity markets and industrial companies that can supply materials historically supplied by Russia.
Earlier this year, the U.S. Federal Reserve raised interest rates for the first time since 2018, and economists expect it will continue to tighten monetary policy to help stem inflation. Financial companies can benefit from a higher interest rate environment, Dunn says, by charging more on loans and capitalising on differences between the interest they pay to customers and the interest they earn through investing. He also notes that financial stocks are also trading relatively cheaply, historically.
With healthcare stocks trading at the widest discount compared with the broader market since 2009,1 companies that manufacture medical technology and pharmaceuticals are also compelling value-investing plays, according to Galko, and economies normalising after COVID-19 can help the bull case.
At the height of the pandemic in the U.S., many patients deferred elective medical procedures. Now, as economies continue to reopen and employment remains high, there could be a resurgence in procedure volume, which would increase revenues for medical tech companies. “The great normalisation of our healthcare system post-COVID is upon us,” Galko says.
Since the pandemic, healthcare innovation has also become a priority for many governments, which can help MedTech companies and drug makers, he adds. Many pharmaceutical companies may have enough new products in their pipelines to achieve strong sales in the next 5 to 10 years, says Galko, despite some analysts’ views that patent expirations pose a risk to profitability.
Russia’s war with Ukraine has already had a profound impact on commodity markets, since it is a major supplier of oil and gas, fertilisers and metals, and other countries are reassessing their dependence on Russia for these commodities. Industrial companies could benefit if countries seek to build liquified natural gas import terminals to replace gas pipelines from Russia or invest more in local energy sources, such as natural gas or nuclear, Dunn says.
Commodities tend to trade in multi-year cycles because of project duration and the time it takes capital markets to adjust to oversupply. Although the war has kickstarted a new cycle of investment in many commodities, after seven or more years of underinvestment, Dunn says, it could lead to overcapacity and the beginning of the next downcycle.