Market uncertainty prompts need for quality stock selection

Quality stock selection is growing in importance for managers, as social and political changes cause uncertainty in markets, according to Nikko Asset Management.

As well as technological and economic disruption, investment opportunities were affected by political and social change such as the rise of populist politicians and the threat of climate change.

Iain Fulton, portfolio manager of Nikko AM’s global equities team, said: “At the moment, the over-riding sentiment of the global ‘crowd’ is anger – which is very unusual at this point of the cycle, with low rates and high employment.  

“Ever-cheaper money has led to ever-increasing asset prices, and there is a perception by the many that this has only been of benefit to the few.  Low levels of real wage growth, an increasing cost of living, and high debt levels in the system overall has left many feeling they have missed out – even as markets and corporate profits accelerate to new highs.”

The key, therefore, when selecting equities was to choose quality companies which were working to find a solution to these environmental and social problems while still offering good returns on capital.

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These included those businesses with a strong competitive advantage, which were gaining market share and were financially stable. They also needed to have sustainable long-term profits and be able to thrive in an uncertain environment.

Fulton added: “Businesses need to make profit but they can (and should) do it in ways which create value for all stakeholders.

“To remain high quality in the future, management of firms need to get the balance right between stakeholders and shareholders.  This is the best way to survive and thrive in the changing social and political environment which lies ahead.”

The Nikko AM Growth portfolio has returned 3.7% over one year to 31 August, 2019, according to FE Analytics, versus returns of 5.4% by the ACS Mixed Asset-Growth sector.