The world’s major economies are back where they were just before the pandemic: late in the economic cycle. Capital Group economist Jared Franz sums up the many risks: Inflation is high and price pressures are growing, preventing the US Federal Reserve and other major central banks from raising interest rates.
Disruptions in the supply chain and rising costs erode corporate earnings growth. Geopolitical tensions, such as the war in Ukraine and the downturn in China, exacerbate these risks.
What does this mean for investors? “Late cycles do not predict recessions, but the economy has less capacity to absorb shocks,” Franz says. “As far as I’m concerned, this is a good time to target the portfolio further towards a range of risks.” Capital Group views three themes positively for the rest of the year.
Rising dividends can counteract inflation
When volatility rises, it’s fine to be bored. Therefore, many dividend stocks are attractive today. As markets plunged in the first half of the year due to fears of declining growth and rising inflation, investors shifted their focus from the fast-growing technology companies and their high valuations to more modestly valued dividend payers.
So far in 2022, pr. May 31, dividend payers have outperformed the broader market. After a few years of cuts and suspensions related to the pandemic, the yield is on its way back.
The companies in the MSCI ACWI (All Country World Index) have paid out a remarkable $ 1.9 billion for the 12 months ending May 31, 2022. That is a 20% increase over the previous 12 months.
“Dividend payments are 20% higher than twelve months ago”
“Today, there are lots of companies that are recovering and even increasing their dividend payments,” says portfolio manager Diana Wagner. “With profit margins that have recently peaked, companies are able to increase their dividends despite inflationary pressures.”
“Commitment on dividend growth is also a strong signal from management about their confidence in their company’s future earnings growth potential,” added portfolio manager Caroline Randall. Companies that pay growing dividends can be found in the financial, energy, commodity and healthcare sectors, among others.
2. Innovation in American healthcare is vibrant and kicking
Healthcare was in the spotlight during the pandemic as several companies produced vaccines in record time. Even today, healthcare companies appear attractively valued in relation to the broader stock market and their own history.
“Some market leaders are particularly attractive given the growth prospects for the products in their pipelines,” said portfolio manager Alan Wilson. Across the industry, pharmaceutical companies, device manufacturers and service providers are transforming healthcare and improving patient outcomes.
“Drug development is in a golden age thanks to the combination of efficient genetic sequencing, the enormous computing power to analyze data sets and precise biochemical tools.”
“Drug development is in a golden age”
A recent advance is the development of antibody-drug conjugates (ADCs), which allow the immune system to target cancer cells while leaving healthy cells alone.
The global market for such treatments is expected to grow from $ 3.18 billion in 2020 to $ 20.01 billion by 2028. Examples of companies seizing this opportunity include oncology pioneers Bristol Myers Squibb, Merck and Roche, who are developing ADCs. , which fights various tumors.
Clap for technology, but the cloud continues to grow
Fast-growing tech companies were in the eye of the storm in the first half of 2022, and many of them saw their stock prices plummet. But patient long-term investors should not be deterred, says portfolio manager Chris Buchbinder.
“Rising interest rates and inflation have certainly clouded the long-term outlook for many of these companies,” Buchbinder explains. “But there are also well-run software companies in high-growth segments with favorable prospects.”
For example, the cloud service business has grown rapidly as companies move their traditional IT features to the cloud. “A few years ago, when Amazon Web Services (AWS) was introduced, the cloud was really a new business segment,” says Buchbinder. “It’s no longer new, but we are still in the early days of this transition.”
“The cloud is no longer new, but we are still in the early days of this transition”
Microsoft was not the first to enter this market, but it now has more cloud revenue than both AWS and Google Cloud thanks to its strong legacy with companies. As of April 2022, Microsoft’s cloud services department achieved 32% quarterly growth from a year earlier, setting it at nearly $ 100 billion in annual revenue.
That Editors of IEXProfs consists of several journalists. The information in this article is not intended as professional investment advice or as a recommendation to make specific investments. Editors may hold positions in one or more of the listed funds. Click here for an overview of their investments.