Europe’s economy and the Brexit effect
November 5, 2019
Capital Group video transcript: “How we’re pursuing winners in today’s environment”
Will McKenna: I'd love to hear any themes that you and the investment team are thinking about that you see out there playing out that our audience would find interesting and that we ought to be keeping our eye on over the next 12, 18 months.
David Polak: The big debate that I pick up a lot within the investment groups at Capital/American Funds is the environment that we're currently in, in terms of just the degree of deflationary pressures. So we have $17 trillion of negative-yielding bonds. That feels very odd. That's about 28% of the global ag[gregate], just to put it into context. And how do you invest in this kind of environment? What are the companies that you should be looking at?
And companies that are growing of their own volition — are less dependent on GDP growth —are probably going to do well in this environment because the cost of money is very low. Actually, the cost of money in some parts of the world is —
Will McKenna: “We’ll pay you.”
David Polak: … extremely low.
Will McKenna: Yeah, yeah.
David Polak: Right. And so that enables you to take a much longer term view, and that plays into a lot of these secular growth — these durable growth — companies, long duration assets, effectively. And there's a ton of innovation out there, whether that's the internet as a zero marginal cost distribution network — that kind of changes everything for a lot of companies. They can go overseas into new markets far more easily. You have the network effect of data storage through the cloud. You have huge medical and scientific discovery going on.
Will McKenna: Yeah, it's a real golden age of —
David Polak: It's a golden age of innovation.
Will McKenna: ... of patent work and innovation in pharmaceuticals and biotech.
David Polak: And that's meeting a period of low rates that allows these companies to thrive in stock terms.
But it's easy to get carried away. You can fall in love with these kind of companies, these themes, and the minute you stop paying attention to valuation, you can easily get lost. And so, the debate I hear is, “How much longer can these kind of companies grow?” And it's different questions for different companies; we're not asking a question about the whole group. But which are the companies that we think the market has yet to really appreciate how far they can grow?
But at the same time — and often outside the United States — you hear the discussion of, “But there's an awful lot of companies that've just been simply left behind.” And the gap between those that have done well — that we continue to like — and those that have been left behind has become really quite large.
But there are a lot that actually represent compelling value in the eyes of a lot of our investors. I've heard a couple of times people say, "It's quite interesting how you can build a diversified portfolio on a P/E of less than 10 times." And that's really interesting.
Will McKenna: Particularly at this point in the cycle.
David Polak: Exactly. And so you're getting almost this barbell sort of approach —
Will McKenna: Right.
David Polak: ... across the investment group of a lot of growthy companies that we continue to really like —
Will McKenna: The real wealth creators —
David Polak: Yeah.
Will McKenna: … the secular growers.
David Polak: Yeah, yeah. And they've got an industry setup that's attractive, a structure that's attractive and growth prospects that we still think are underappreciated in the stock market.
At the same time, there's a lot of companies that have actually grown stronger through really difficult times. And we have found, over the years, tremendous opportunity in companies that have had to face, for instance, overvalued exchange rates or tough economic conditions in their major markets. And what doesn't kill you makes you stronger. And a lot of these companies are reflecting the problems they've had rather than the steps they put in place to actually deal with those problems and begin to expand. And those stocks can often generate fantastic returns as the market begins to pick up on the fact —
Will McKenna: The changes that they've made to strengthen their balance sheets and strengthen their operations.
David Polak: And when they have a low valuation to start with, that flows through really, really quickly. So you have all these interesting discussions, these crosscurrents going on.
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