As decades-long trends of globalization and tech euphoria show signs of fraying, portfolio manager advises focus on fundamentals
Following the events of the COVID pandemic, the world is going through a violent period of economic upheaval and financial market turmoil. But even during this time disruptive and potentially permanent change, one portfolio manager stresses that investors have an opportunity to capitalize on – as long as they can stay disciplined.
“I think globalization has potentially taken a step back,” Ric Palombi, Senior Portfolio Manager, International Equities and Alternative Income at CWB Wealth Management, told Wealth Professional. “There is reason to want to onshore, and I think that's going to start happening to some degree.”
Following the disruptive chip supply shock that sent manufacturers scrambling during the pandemic, Palombi says both the U.S. and Europe now want to produce more chips in their home country, which would require a significant amount of capital spending. With a semiconductor gold rush underway, he said investors are poised to benefit by investing in companies that provide the “picks and shovels.” To that point, he says CWB WM’s investment portfolio includes ASML, a company that produces machinery to help produce those chips.
Of course, it’s unlikely to undo decades of globalization, and Palombi notes that it’s just better to leave some products to certain countries or regions that are able to do so most efficiently. With a manufacturing complex that’s dominated multiple global sectors, China will likely continue to feature prominently on the global scene, and is even moving to produce more high-value products as the country seeks to raise its economic productivity further.
“I think while there is some degree of nationalization, and potentially onshoring, there's still going to be opportunities for companies to take advantage of both trends,” Palombi says.
In the short term, he pointed to the significant hit many companies have taken to their share prices, mostly because of the Federal Reserve. As the Federal Reserve has been raising interest rates to combat inflation, partly due to supply-chain issues, he says longer duration assets l like some tech companies have revalued to the downside.
Beyond the fallout of pandemic-related supply-chain disruption, he also says many companies that were lifted up amid the euphoria of the pandemic are going through a hangover period. Many investors thought companies that did well during the pandemic, including Netflix or Shopify, would continue to do so. But now investors are coming to grips with the fact that the growth rates of those companies are not as strong or sustainable as they might have expected. As profits have slowed down and growth rates reset, those companies have seen their multiples contract significantly.
“I do think that with that contraction comes opportunity,” Palombi says. “In all the volatility and the uncertainty and the ever-changing narratives, a lot of times, people get fearful. That's where as investors, it’s our job to find value based on fundamentals … making sure we're taking advantage of the volatility and getting those companies that we feel have been oversold and mispriced, into the portfolio.”
Of course, there’s no getting away from the fact that company valuations have been hurt dramatically. Even as investors try to focus on the fundamentals, Palombi says the emotion of the overall situation and the markets will naturally colour their interpretations of how they view those fundamentals. That only underscores the anchoring role that a solid investment plan can play.
“When you have a good investment plan that’s anchored to your time horizons and how you look at the world, and you're disciplined, you can take advantage of these situations. Anyone who bought during COVID, or the global financial crisis knows what I'm talking about,” Palombi says. “If you're doing that, and buying in these types of situations, that's how you plant the seeds to make returns down the road.”
