The Point

Global equities: What to look for when investing in AI

Which companies will benefit from AI technology in the long term? Which are just caught up in a short-term frenzy?

It’s about more than investing in companies providing computing power or AI services, says Sue Scott, an analyst with Pendal’s Concentrated Global Share Fund.

“When we talk to companies, we’re looking for signs that the board and management are examining how the technology can improve their products and services and increase productivity.

“Does the board have technical expertise? Are management introducing pilot programs? Are they thinking about the ways they can harness AI to improve productivity?

“We also want to know a company has a strong governance framework around what they’re doing with regard to AI.”

“They’re the sorts of things were asking any of the companies we invest in.”

Three ways impact investing can help diversify equities portfolios

Impact investing works in three ways to provide diversification to traditional equities portfolios, says Tim Crockford, who heads up Regnan’s impact investing team:

1. Good exposure to smaller and mid-cap companies
2. Early access to future growth stocks focused on new, emerging market segments
3. Long investment time frames

Impact investing funds such as Regnan Global Equity Impact Solutions Fund focus on identifying the listed companies best placed to solve the world’s biggest problems.

Right now stocks equities in the $1 billion to $10 billion range are trading relatively cheaper than their larger counterparts – an inversion of normal patterns driven by appetite for US mega-cap tech stocks, says Tim.

“You’d normally expect to pay a premium for small companies because they tend to have higher growth rates,” says Crockford. “But something has changed across 2022 and many smaller caps are now trading at a lower PE multiple than large caps.

Impact investing: time for small and mid-cap stocks to shine

We can debate whether the era of easy money is over.

But there is less doubt that the era of large-cap, beta-driven, passive investing is over, says Regnan’s head of impact investing Tim Crockford.

Investors should now be considering small-and-medium companies where valuations are more appealing than large caps, says Tim, who manages Regnan Global Equity Impact Solutions fund.

“Over the long-term, small caps have been a powerful driver of returns because they typically grow their earnings much faster than large caps,” he says.

Tim’s team looks for innovation in the small and mid-cap space – particularly those with potential to address pressing environmental and social challenges.

“While valuations have come down, for the right companies fundamentals remain intact.

“Long-term growth expectations for some companies exposed to these transformational themes are too conservative.”

Global equities: Be patient, but ready to pounce

Most global equity markets are in a drawn-out, bottoming process, says Pendal’s Chris Lees, who manages Pendal Global Select Fund.

But several segments are showing improving relative fundamentals, share prices and attractive valuations, he says. These include:

• Quality growth stocks, many of which are down up to 50%
• UK and European global champions, plus Japanese exporters
• Emerging markets domestic consumption stocks
• Stocks exposed to China’s reopening and recovery

“Given the recent rally and 2023 recession risks we will wait to buy the dips throughout the year,” he says.

Lees remains 50% bullish and 50% bearish on equity markets.

“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or a larger event such as a contagion.

“Medium-term reasons to be bullish include the Fed regaining credibility with inflation and interest rates stabilising this year.”