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Reign of uncertainty creating investment opportunities

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MEDIA RELEASE: Australian investors need to focus less on short-term disruptions and place greater emphasis on investments likely to offer long term sustainable earnings growth, according to SG Hiscock & Company portfolio managers.

Hamish Tadgell, portfolio manager of the SGH High Conviction Fund, said the emergence of the omicron variant of COVID-19 highlights the current uncertainty facing investors and need to take advantage of developments through taking a longer a long-term view that allows for flexibility.

“Investors need to be aware that an over-reliance on models can be dangerous, resulting in them not seeing the wood for the trees, or understanding the real issues facing them. They need to be able to adapt to change and take advantage of emerging trends such as the seismic shifts underway in decarbonisation and social infrastructure.

“It’s important that investors don’t fear uncertainty – it forces change, new ways of doing things, ingenuity, entrepreneurship. It is fundamental to an understanding of social, technological, and economic progress.

“If we can manage risk, we can not only live with uncertainty but paradoxically enjoy it! Uncertainty forces change, new ways of doing things, ingenuity, entrepreneurship. It is fundamental to an understanding of social, technological, and economic progress.

“We need to think about how to position the portfolio in the face of heightened inflation risk,” he said.

Mr Tadgell said it is hard to know if the current inflation pressures will be more structural in nature starting a regime change and shift from the deflationary era of the last 30 years to an inflationary era.

“But there is little question in our mind the inflation risk has increased with the COVID shock and unprecedented fiscal intervention and it seems prudent portfolio risk management to build some inflation protection into portfolios.

“Long term secular forces are important drivers of future returns but we think it is important to have a barbell approach to manage the short-term forces and uncertainty. Identifying quality stocks with sustainable earnings growth is key in this environment. Some areas of likely growth include social infrastructure, debcarbonisation and national security,” he said.

Portfolio manager of the SGH Medical Technology Fund, Rory Hunter, agrees, and said seismic shifts in the way people live are accelerating technological and social investment themes, in particular.

“While there is currently excess liquidity in the market, investors are being more selective in identifying longer term stocks.

“All the demand drivers are in place to drive the performance of medical technology investments but there are valuation headwinds in the near-term. Investors continue to position portfolios to withstand a removal of the excess liquidity which has been a mainstay of financial markets since the onset of the pandemic.

“An oversupply of healthcare companies listing on the ASX and the macroeconomic backdrop has created short-term headwinds,” he said.

Grant Berry, AREIT portfolio manager, says the trend of short-term headwinds but longer-term tailwinds can also be identified in listed real estate investments.

“Broader business and consumer conditions continue to have a major role to play in how the office and retail property sectors perform respectively. When out of lockdown, many retail assets are supporting tenant sales above pre-pandemic levels. While we expect online sales growth to outpace sales growth from physical retail, both are growing. Physical retail has responded with improved click and collect and longer-term mixed-use development opportunities.

“Likewise, while flexible working arrangements are affecting office demand, we are also seeing that changing “people occupancy” levels don’t automatically mean a rise in official building vacancy levels, as the office may have peak and off-peak demand days. For example, in Perth CBD people occupancy is at 76 per cent of the pre-pandemic levels yet the official vacancy rate has declined to the lowest level in over five years.

“Industrial property is the favoured subsector; however, with the sharpest yields and limited differentiation in pricing between quality and secondary assets, we are more cautious.

“For 2022, the overarching message is that investors should be prepared to deal with ongoing uncertainty but they shouldn’t fear this. Instead, they should be on the lookout for the quality investment opportunities that will inevitably arise.”

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