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Two tumultuous years have fundamentally transformed the economic landscape, and investors need to adjust their expectations and strategies, says Jennifer O’Hara Martin, vice-president and portfolio specialist for global equities with T. Rowe Price.

“We’ve embraced a new normal,” she said. “Our set of underlying assumptions about the world are a bit different than they were before.”

The Baltimore, Md.-based specialist said opportunities can be found when other investors are too easily spooked by changing market conditions.

“Time arbitrage is a very large advantage for us. What that means is the market is very short-term focused, and taking the longer term often plays to our favour,” she said on the Soundbites podcast this week.

“During the pandemic, through the upticks and volatility, we’ve sought to capitalize on market capitulation, where — to use that expression — they threw the baby out with the bathwater. It creates really attractive entry points for truly special long-term growth businesses.”

Martin said research is the best way to prove anomalies in the equity market. She remains on the hunt for high-quality companies that offer higher growth in good industries, as well as valuation opportunities that give high-conviction upside potential.

Among the themes she’s monitoring closely are the likelihood of recession, a prolonged war in Europe, structurally higher interest rates, the endemic phase of Covid, and the re-awakening of China.

She said the U.S. is on track for a mild recession, while Europe could experience something more significant. And while she accepts there is a lot of ambiguity about size and duration, she said the coming economic slowdown could be “one of the most well-telegraphed recessions that we’ll experience in our lifetime.”

“Company management teams don’t have their heads in the sand. They know a storm is coming. They just don’t know when it’s coming, how long it lasts or how bad it will be.”

Martin said the largest interest rate moves have likely already been made, but there remains general uncertainty about the level of terminal rates.

The cost of money is likely to stay higher than recent historical values, carrying significant impact for company valuations, particularly among high-growth companies. It may be time to cut some of the more expensive names, she said.

“People’s memories will linger, after the bubble pops, on some of those high-growth names,” she said. “But there could be some really attractive re-entry points for those who are patient.”

Martin believes current economic conditions — including higher interest rates, wider credit spreads, less severe deposit outflows and manageable credit costs — are particularly favourable for money-centre banks and insurance companies.

“Money-centre banks weren’t even on our list over the last couple of years, given the low-interest-rate environment,” she said. “But that’s different now with most central banks taking on more hawkish views on interest rates to try to combat escalating inflation.”

Among the names she likes are New York-based JPMorgan Chase & Co., Ohio-based Fifth Third Bank and Ohio-based Huntington Bancshares.

Insurers, meanwhile, are benefiting from a multi-year investment tailwind that is bringing improved incomes and strong underwriting profits. She is bullish on Marsh & McLennan Companies Inc., MetLife Inc. and American International Group (all based in New York), as well as New Jersey-based Chubb Corp. and Hong Kong-based AIA Group Ltd.

“While equity markets continue to be very noisy and very driven by macro factors, we’re encouraged that corporate fundamental earnings, which along with free-cash flow generation ultimately drive long-term stock prices, have come into greater focus,” she said, adding that active investors should be especially pleased to see such differentiated stock performance.

“Bottom line, if we take a two- to three-year view, we still think people will want to own amazing businesses, in amazing end markets, with great growth and great management,” she said.


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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