Citywire A-rated Richard Pitt, CFA
CEO at BlueAlpha Investment Management and manager of the BlueAlpha BCI Global Equity fund
There are signs of a possible rotation out of US equities into selected European equities in global markets. How do you currently view these two opportunity sets?
There has been much talk of a possible rotation out of the US and into ‘value’ regions like Europe and Japan – particularly in the context of any risk-on turnaround post-Covid. In turn, we’ve received numerous queries related to positioning, as the BlueAlpha BCI Global Equity Fund has been relatively heavily weighted toward the US (+-80% exposure to US-based companies).
We don’t necessarily view the US or Europe as two separate opportunity sets. Rather, we seek out companies with high returns that are able to grow. Over time, these are the businesses that are meaningfully able to compound returns for investors.
We also expect to pay up for these returns, as it’s rare that you’ll encounter a great business with outstanding long-term prospects that’s cheap. With this philosophy in mind, many companies that meet these criteria are listed in the US.
That’s not to say that there aren’t any European or Asian businesses that fit this profile – Tencent and Alibaba are great businesses that earn most of their revenues from China – it’s just that these types of operations are more frequently large global businesses with strong market share that happen to be US-based.
Given the reach of companies like Apple or Amazon, their exposure to both developed and developing markets allows them to take advantage of strong returns, regardless of regional biases. Some examples from the portfolio include Mastercard, which earns only 32% of its revenue from the US; Domino’s Pizza, which operates in 90 markets, and so the fact that it was founded in the US is just legacy; and PayPal, which generates 47% of revenue outside of the US.
Given the impacts of the pandemic and the responses of both governments and central banks, liquidity is at all-time highs and inflation is still some way off. In this context, blue-chip businesses with strong market share and growth opportunities seem to be the only option for investors.
Furthermore, plunging discount rates mean that businesses that are able to generate strong cash flows, are seeing the value of those cash flows increase substantially. With this in mind, it also explains why tech companies are almost single-handedly driving markets higher. This is an industry which generally has high returns on capital as well as good growth – they generate a lot of cash. Covid-19 has also mostly enhanced the growth of many Tech companies by fast-tracking the behavioural tailwinds which were already in their favour.
With all of these points in mind, we see the best opportunities in businesses with a strong global reach, that are able to sustain high returns, and fuel growth with the cash that they generate. The majority of these types of opportunities are often in the tech space, or employing tech to their benefit. We will continue to seek out companies that present the best possible opportunities for investors – wherever they’re listed.