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Sarah Ketterer, Causeway Capital Management LLC Sammy Simnegar, Portfolio Manager, Fidelity Investments Katie Rushkewicz Reichart, Director, Equity Strategies, Morningstar Research Services LLC

Portfolio > Economy & Markets

Where a Value Manager and a Growth Manager See Opportunities, Risks Now

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What You Need to Know

  • The sell-off after Russia's invasion of Ukraine created opportunities, Sammy Simnegar of Fidelity says.
  • He likes luxury companies like LVMH that don't get squeezed when the mass market does.
  • CEO Sarah Ketterer of Causeway Capital says investing in China is critical, Simnegar sees a major shift in progress there.

Causeway Capital CEO Sarah Ketterer and Fidelity portfolio manager Sammy Simnegar take different investing approaches but both see opportunity in international markets, despite significant uncertainties surrounding China and Russia’s Ukraine invasion.

Value manager Ketterer and growth manager Simnegar, discussing their perspectives last week at the Morningstar Investment Conference, also cited notable economic risks domestically and globally, given geopolitical events, supply chain disruptions and high inflation.

“There are exceptional companies in the emerging markets and international markets,” Simnegar said. “There’s a lot of money to be made and a lot of money in active management relative to the benchmarks.”

Longer term, Simnegar sees conditions as more bullish for developed markets.

Ketterer noted that non-U.S. managements and companies tend to emerge well from crises. “I wouldn’t give up hope on non-U.S.,” she said. “We think it looks excellent for the next decade.”

Opportunities Post-Invasion

Irrational selling created buying opportunities after Russia invaded Ukraine on Feb. 24, she said, noting a European equities swoon as investors abandoned any stock with exposure to Russia.

 “It was sold off heavily,” with more market cap destruction than the actual value of whatever the companies had in Russia, “and that created an opportunity for us to buy more of some great companies, because we’ll get through this, it’s just taking a while,” said Ketterer.

Causeway has started adding positions in select European banks with hard-hit stocks. The selloff left European financials trading at the same levels they did during the global financial crisis, but with “demonstrably more financial strength,” she noted.

(Simnegar considers banks to be commoditized and while he owns a few, he said he tends to avoid them.)

Effects of the prolonged Ukraine crisis will be tough for Europe economically, said Ketterer, who expects rationing and conservation measures next winter as countries face cuts in Russian energy supplies on which they’ve depended.

Investors may find a silver lining in European utilities and their renewable energy investments,  she said. “They’re carrying the mantle,” she said. The need for renewables is inexorable. The byproduct of this invasion is not just misery and just terrible tragedy in the Ukraine, it’s also the urgent need for Europe to become energy independent and they’ll need transition fuels like natural gas.” 

After the invasion, Causeway added stocks in industries it normally doesn’t invest in, including certain tech stocks, while sticking to its buy and sell discipline, said Ketterer.

“It’s very hard to know where the bottom is for the market or stocks in particular,” but her firm works with specific valuation criteria and analyses that point managers to promising portfolio candidates, she said.

The effects of Russia’s invasion on commodities, such as oil, agriculture and metals, has hit the global economy and caused the Fed to be much more aggressive, Simnegar noted.

Hard Landing, Recession Possible

“I think the chances of a soft landing have come down dramatically and I think the chances of a hard landing have gone up a lot,” he said.

“This next crisis has created more inflationary pressures and they look to be prolonged,” Ketterer added. She called recession likely in Europe and possible in the U.S., and said cyclically sensitive stocks such as industrials, materials and financials should do well coming out of a recession.

 “They’re going to come roaring back and we think it’s absolutely essential to be positioned for that,” she said. 

Simnegar has generally pulled out of China despite a positive view of the economy there, going from a bullish to a neutral view based on government crackdowns on business. If there are further actions against the private sector, “I’ll probably take that weighting down as well,” he said. “Whenever the government gets too involved I tend to run away,” he said.

Causeway has less exposure to China now than it did two years ago but Ketterer considers the country “absolutely critical,” given it accounts for more than 30% of the emerging market index. “You can’t keep pressuring your private sector, which is the source of all your GDP growth and expect anything positive to happen from that,” she said, adding that China’s pandemic-related lockdowns and travel restrictions create the biggest pressures now.

Ketterer sees opportunity, however, in Chinese airports, which she called good infrastructure businesses that collect fees and face no competition.

“From an emerging markets perspective, we’re advocates,” not taking an overweight view but interested in taking part, especially after the selloff, said Ketterer.

Supply Chains Shifting From China

Simnegar noted that many manufacturers are moving out of China, and cited a major athletic shoe maker that’s taking most production elsewhere in Southeast Asia. Semiconductor manufacturing is returning to the U.S. and Europe out of concerns over intellectual property, he added.

“A lot of more sensitive areas of the supply chain are being rebuilt closer to home and the home markets, and I think that’s a major trend that’s happening. And because wages are high and workers are scarce, I think you’re going to see more automation, so you want to own companies that are very much geared toward providing solutions in terms of automation, software, hardware,” Simnegar said.

Longer term, Simnegar thinks economic conditions are “very bearish for emerging markets and very bullish for developed markets,” with more job creation expected in developed markets and rising interest rates and inflation more difficult for emerging markets. “You want to be more invested in R&D, technology-oriented, future-facing businesses developing their supply chains in developed markets,” he said.

Simnegar avoids commodity-oriented companies and is bearish on oil longer term because he thinks electric cars will destroy demand for oil over time. He likes reasonably priced, high-quality, exceptionally well managed companies with compound earnings that he can hold, like luxury brand LVMH.

He said he’s not interested in businesses that depend on the president or the Fed or oil prices.  “I like companies that have their destiny in their own hands, they’re based on premiumization and luxury,” he said. Big box retailers, in contrast, don’t have the same kind of pricing power, he added. “Their customers are getting squeezed and they’re getting squeezed.”

Market risk is lower now than it was a year ago, with the Russia instability taking some air out of the bubble, according to Ketterer. “There may be more to go, it’s hard to know how much more. From an investment level, we’re calmer now,” she said.

“We’re not in boom any longer and so that creates an extra level of conservatism,” she said. “If you’re a value manager you’re already looking at stocks with some level of skepticism and they need to be sufficiently undervalued to create that margin of safety.” 

Left to right: Katie Rushkewicz Reichart of Morningstar, Sammy Simnegar of Fidelity and Sarah Ketterer of Causeway Capital Management. (Photo: Matthew Gilson Photography)