After years of stock market leadership, US equities shared in the severe global downturn witnessed during H1 2022 – as evidenced by the S&P 500 suffering its worst first half of the year since 1970.
Volatility was significantly higher during the period, as investors were confronted with a multitude of negative factors – including heightened inflation, monetary policy tightening, continued supply chain strains, and the return of war in Europe.
However, as stock prices across all sectors – excluding energy – moved sharply lower, five fund managers were able to capitalise on attractive entry points in a number of high-conviction names.
Gabe Solomon, portfolio manager of the T. Rowe Price US Large Cap Value Equity Fund
Driven by strong underlying demand and a steadily expanding end market, semiconductor companies delivered exceptional returns to shareholders over the decade through to the end of last year. However, the narrative began to change earlier this year as fears over decelerating demand took hold. Valuations of the leading companies in the space had become more demanding, as many investors assumed the rapid growth would persist uninterrupted. Within our US Large Cap Value Equity portfolio, we reduced our aggregate semiconductor exposure over the past nine months, due to concerns supply chain challenges may have led to over-ordering, likely creating an air-pocket for demand and an inventory correction.
However, some companies within the group have been excessively penalised during the recent downturn. A good example is Qualcomm, which has been caught up in the sell-off affecting many of the higher multiple names within the information technology sector. Near term, we expect Qualcomm to continue capitalising on the ongoing 5G mobile rollout. Longer-term, the company will benefit from its industry-leading cellular connectivity equipment, in what we anticipate will be an increasingly connected world.
Jacob Mitchell, founder and chief investment officer at Antipodes Partners
Leading pharmaceuticals company Merck is a quality defensive business that is not facing the same inflation pressures as other defensive parts of the market. Almost one-third of the company’s earnings are generated from vaccines and animal health, which have high barriers to entry, consolidated market structures and, as a result, higher profitability relative to traditional drug development. Merck manufactures the HPV vaccine Gardasil, which has been proven to prevent a variety of cancers and has a long runway for growth – while the animal health business has high brand equity, particularly among herd animals.
In terms of its pharma business, Merck’s Keytruda is the most successful immuno-oncology drug globally. While the patent cliff begins at the end of 2028, Merck is preparing itself via combination studies with next generation immuno-oncology drugs that could extend Keytruda’s dominance, internal pipeline development via its own R&D engine, and ample balance sheet capacity for acquisition.
Joakim Ahlberg, portfolio manager of Nordea’s North American Stars Equity strategy
During the first half sell-off, we witnessed an attractive opportunity to buy into stocks within the semiconductor space. For example, we took a position in fabless semiconductor company Marvell Technology, which outsources manufacturing to TSMC. Its business model is interesting, as its customers fund R&D, enabling Marvell to scale without taking on excessive risk. If Marvell can sustain low to mid-teen revenue and margin expansion, leading to 20% earnings growth, we believe the valuation discount it displays relative to structural growth semiconductor names can close.
Elsewhere in semiconductors, we also added Nvidia, which designs, develops and markets 3D graphics processing units and software. The company started in gaming, but has since expanded to data centres, automotive, software and other industries. We see Nvidia as a modern ‘picks and shovel’ play, which enjoys several tailwinds for the foreseeable future. After the stock sold off more than 50% from its highs – and the valuation came down from a peak of 56x EBITDA to about 24x – we saw an opportunity to start buying into a company we believe can still achieve annualised growth of 20% or more over the long term.
Paul Middleton, global equity portfolio manager at Mirabaud Asset Management
In general, we do not hunt for bargains, but the market has clearly derated significantly from the highs, and there are some attractive opportunities in secular growth names. We would not be adding any cyclicality at the moment.
One secular growth opportunity we have recently added to the Mirabaud – Sustainable Global Focus Fund is Quanta Services, an engineering and construction company focusing on electrical grid building, maintenance, and repair. It is the clear market leader in this space, with 60% share. This fits into our decarbonisation theme, as electricity networks need to be substantially rebuilt to withstand climate change and to join renewable power assets, which are highly geographically distributed.
James Knoedler, manager of the Evenlode Global Equity Fund
Mastercard is increasing its activity in B2B payment flows. Historically, these have been dominated by payments between bank accounts, either via wire – direct instant transfer – or automated clearing house, an end of day batch netting transaction between banks. These suffer from irreversibility, low information content, and either high cost or slow settlement, or both. Cross-border payments add a layer of complexity and cost, as they tend to hop between intermediary banks via the SWIFT messaging system.
Mastercard now has the capability to initiate and receive payments using both card and bank account credentials, and importantly can create a layer of chargebacks, fraud protection, and rich information context around them. These are as valuable to corporate treasurers as they are to consumers. As the C2B market becomes increasingly mature and digital, we are excited about the potential for the payments schemes to provide increasingly sophisticated payments solutions in the B2B market. We are confident in Mastercard’s ability to integrate new technologies and provide high value-add services to clients. This should allow an extended runway for growth and add significant value over the long term.
