If not tech then where?

VT Tyndall Global Select Fund

If not tech then where?

Last week our North-American Fund manager detailed his reasons as to why he thinks that it is too early to return into technology stocks, and as the chart below shows that the correction in the S&P technology sector has not been as severe, so far, as it has been in recessionary periods seen in the past 30 years despite the elevated valuations that many of the companies commanded at the turn of the year.

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If it is too early to take advantage of the correction in technology stocks, then the question is where should investors invest their money as cash will not preserve the real value of an their wealth given the current rates of inflation. Until the past week, the tradional defensive nature of Consumer Staples companies have proved to be a good sector for preserving wealth, however, concerns over the ability to continue to take price when consumer wallets are squeezed have led to this sector looking more exposed than investors had originally believed.

The Household and Personal Goods subsector has many world-class companies within it, however, commodity and agriculture prices are a significant factor in their cost of goods sold, and transportation costs are a further large cost item. All of these factors remain elevated and well above the levels experienced last year, and thus will provide a headwind to earnings and margins. Despite this the sector trades on a premium to the overall market that is wider than an point this century and the risk of this closing to the long term average premium is a risk worth considering; Walmart and Target’s recent reports serve as warnings as to how the market may react to consumer companies that cannot protect margins and put through the cost increases needed to do so.

While there are risks to investing in Consumer Staples, we believe that there are examples of companies with the sector that can overcome these headwinds and protect and grow the real value of capital invested, but they need to be selected on a bottom-up analysis rather than a top-down prism.

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Beyond Consumer Staples, Health care is another sector that tends to act as a more defensive sector during market corrections, and this year the sector has the positive backdrop of the mid-term elections, which are likely to see the democratic control of both the Presidency and both Houses on Capitol Hill be overturned. A split within the law making bodies in Washington reduces the risk of sweeping reforms and legislation reducing pharmaceutical pricing. Compared to the Consumer Staples sector the valuations appear much more attractive and are inline with their long-term average.

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The pharmaceutical sector’s vast research and development spending, that leads to new drug discovery and equipment development serves to enable companies to push through pricing on a regular basis as medical care and treatment is effectively an essential service where the customer tends to be price agnostic. Treatment programmes and consumables provide the companies with a high percent of recurring revenues, and in many treatment areas, the total addressable market is increasing every year.

As with Consumer Staples, we believe that the sector needs to be analysed on a bottom up basis, with careful stock selection, but we believe that the sector has many attractive companies with fundamental growth drivers, many of which are a-cycical, and is thus well set up to preserve and enhance consumer wealth through periods of uncertainty.

25th May 2022
Read time : 4  mins

This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
Not for retail distribution – this document is intended for professional clients only
Disclaimer

WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not