Amidst a flurry of geopolitical volatility, RBC Wealth Management accesses its strategy following the Brexit result, whilst anticipating potential investment opportunities.
Frederique Carrier, director, head of equities at RBC Wealth Management says that the world has become a more complex environment due to geopolitical events of late. Regarding the fallout from Brexit, she notes that the leadership question being resolved quickly, with Theresa May taking over as UK Prime Minister, was certainly a positive for stability.
Carrier says that one uncertainty is over what Theresa May means when she says “Brexit means Brexit”. One concern is over whether the UK will retain access to the European single market. Carrier predicts that the UK will experience a mild recession in the second half of 2016. However, she feels that it could be extended if the UK does not have access to the single market.
With regards to the immanent US presidential election, Carrier says that policy platforms will be watered down. A Trump win could result in a boost to growth in the short term – due to lower taxes and decreased regulation. This is in contrast to a Clinton win, where Carrier believes more stringent taxes on companies could be put in place.
However, Carrier adds that a Trump win would likely cause long term growth to be slightly hampered, should the US become more of a closed economy.
Carrier adds that higher volatility is expected over the next 18 months due to a heavy electoral cycle in Europe, with countries representing 50% of EU GDP entering into elections (Italy, France and Germany). However, she expects political risk to subside after 2017.
In terms of asset allocation, RBC Wealth Management is underweight towards fixed income and equities. Carrier says this is to take advantage of future opportunities that will arise from volatility.
RBC’s company focus
Dominic Wallington, senior portfolio manager, head of European equities at RBC Global Asset Management, says that RBC is looking to focus on investment in individual companies, with a particular focus on firms which are less correlated to macro economic risks. He adds however that RBC is “not a thematic investor”.
Wallington says that companies can be particularly supple in challenging times, as they can allocate internationally and are not as tied to local developments.
Wallington adds that some companies will be relatively un-affected by global trends. He uses the example of Novozymes, a company with a 47% share of the global enzymes market. He illustrates that the company has end markets in 40 industries from bioethanol to laundry detergents to baking, brewing and wine.
Wallington says that Novozymes spends 14% of its revenue on R&D (three times that of the average MSCI Europe company), yet still makes returns of 3 times the cost of capital.
Wallington cites another example, Essilor – a French headquartered company with a 40% share of the global corrective lens market. He says that demand for lenses is likely to increase due to more frequent use of electronic devices, a rise in urbanisation and increased levels of diabetes. Short sightedness has allegedly doubled within a generation, and approximately 90% of male students in Seoul, South Korea, wear glasses.
Wallington notes that Essilor is a highly profitable company with low levels of capital intensity – achieving returns of five times the cost of capital.
Wallington further touted the resilience of companies during times of political crisis, using an example of Prada during World War 2. However, Prada will certainly have been the exception rather than the rule. If RBC is to have a focus on individual companies in these volatile times, it will have to bet on the winning horse.