Recession or not, fundamentals remain key to investing
(Runtime: 5:00. Read the audio transcript.)
It’s better to focus on investments than obsess about the state of the macroeconomy, says Dustin Haygood, client portfolio manager at Aristotle Capital Management.
He believes whether the economy has slipped into recession should be far less important to advisors than whether the companies in their clients’ portfolios have solid fundamentals.
“Be macro aware,” he advised, “but in the current market, it’s important to stay disciplined and long-term focused.”
Speaking on the Soundbites podcast, Haygood said quickly reacting to the news of the day is rarely a winning strategy.
“It’s incredibly hard to predict the timing of a recession. That’s not how we believe investors should spend their time,” he said. “Instead, anticipate the inevitability of recessions by building portfolios with high-quality companies that have proven they can withstand times of adversity, they can gain market share when competitors are struggling, and they have pricing power.”
As an example, he said he and his colleagues at Aristotle recently spent time looking at Tyson Foods Corporation of Springdale, Ark. — not discussing the potential outcomes for large macroeconomic factors like inflation or war in Europe, but rather to better understand how the company is incorporating automation into its business and becoming more productive.
“It is important to understand competitive dynamics of industries and how companies are changing and improving,” he said.
Haygood noted that two consecutive quarters with mildly negative GDP growth technically puts the U.S. in recession. But it will be up to The National Bureau of Economic Research to make it official after it examines the numbers more closely.
If the U.S. avoids recession this year, he said, it will likely be due to stubbornly strong consumer spending.
American consumers saved almost $2 trillion during pandemic lockdowns, he pointed out. And they’ve been drawing on that during the Covid recovery to fill their shopping carts.
“Consumer spending is the main driver of GDP in America, and it has held up well this year, even with depressed sentiment and inflation which has eroded purchasing power,” he said.
And while consumers will eventually come to the end of savings-driven spending, an uptick in wages could help maintain healthy spending levels.
“Job openings right now well exceed the number of unemployed workers,” he said. “And if wage inflation starts to outpace price inflation, that would boost the purchasing power of households.”
According to Haygood, periodic economic recessions are a necessary way for economies to get rid of the built-up excesses created during expansionary periods.
“We of course don’t enjoy tough times in the economy. But, for this reason, it does make sense to embrace slowdowns,” he said.
Names he likes
In addition to Tyson Foods, he has been watching a couple of other companies closely.
Autodesk, Inc., of San Rafael, Calif., is a software company whose computer-aided design products address increasingly address inefficiencies in building projects.
“Autodesk is at the forefront of improving the communication between all the different parties that have a hand in running a building project from start to finish,” he said. “This makes the company very well positioned to benefit from the drive towards efficiency in the [construction] industry, and the increasing mandates for open standards to allow data to be shared across stakeholders.”
He also likes tire manufacturer Michelin, based in Clermont-Ferrand, France, which he believes will benefit from the global move away from internal combustion engines, in favour of electric power.
“Since electric vehicles are significantly heavier, due to their batteries, and produce a lot more torque, tires wear out much quicker, and that leads to faster replacement of tires,” he said. “We like Michelin’s premium position in the tire market and higher-end technology. That means they’re able to charge more for their tires, especially the larger diameter tires which are much more profitable and have a high loyalty rate among Michelin customers.”
Haygood has also kept close tabs on the housing industry, which he describes as “one of the most interest rate-sensitive parts of the economy.”
The good news is that despite evidence of a slowdown in housing, there remains a structural undersupply of housing in the United States. And new lending rules have added more stability to the system.
“The housing market, it’s on a much stronger footing than it was pre-2008 crisis,” he said.
Meanwhile, the biggest hurdle to economic growth — inflation — appears to be coming under control through the painful process of raising interest rates and unwinding the Federal Reserve’s balance sheet.
“It takes a lot of political willpower to tighten monetary policy, slow down the economy, and cause unemployment to increase. But, given what we’ve been hearing from Fed chair Powell lately, there’s some reason to be cautiously optimistic that the Fed will follow through on that path.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
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