David Souccar, co-portfolio manager of the Virtus Vontobel Foreign Opportunities Fund, discusses valuations, how to protect against inflation, and areas of the market where investors should tread carefully.
Key takeaways from the discussion:
- Some of the worst-hit areas of the market, such as hotels and airlines, have rebounded and the market is pricing in an end to the pandemic. We are more concerned with the rate of recovery within sectors rather than regions, even though countries vary greatly in their COVID response and vaccine distribution. Investors should tread carefully with companies whose stock prices have been driven by expectations of a COVID recovery.
- Valuations in aggregate are at historic highs, with segments such as technology and renewables overvalued significantly. But valuations are reasonable in other areas and investors can still find interesting opportunities. Stock selection is critical in this bifurcated market.
- Today’s investment landscape is filled with uncertainty around rising interest rates and inflation. We think the best way to protect against inflation is to invest in businesses with pricing power, those that provide unique value to customers, and have resilient earnings growth.
- Consider two companies in the same industry: Ferrari can protect against inflation while Volkswagon may not. In a highly competitive business, Volkswagen has low margins and profits from volume. Customers will have less purchasing power in an inflationary environment and Volkswagen may be forced to lower prices. Ferrari, on the other hand, produces at a low volume and sustains higher margins. With a two-year wait list for its cars, Ferrari has the option to increase prices to its high-end customers, sell higher value-added cars, or even cut supply.
- To weather today’s uncertain environment, investors should look for a quality portfolio that balances growth, sensible prices, and risk. International equities can provide diversification with exposure to different types of business and growth drivers.
The commentary is the opinion of Vontobel Asset Management. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
Past performance is not an indication of future results.
IMPORTANT RISK CONSIDERATIONS
Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk. Foreign & Emerging Markets: Investing in foreign securities, especially in emerging markets, subjects the portfolio to additional risks such as increased volatility, currency fluctuations, less liquidity, and political, regulatory, economic, and market risk. Market Volatility: Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the portfolio and its investments, including hampering the ability of the portfolio manager(s) to invest the portfolio’s assets as intended.