While US inflation is on a downward trend, upward pressures on rental costs, a key component of core inflation, could prevent inflation falling below 3% by the middle of the year. A lack of supply of new housing is driving rental costs higher by 5.7% plus, feeding into core inflation which hit 3.8% on an annual basis in February, down slightly from the 3.9% rate recorded in January.

That background raises the concern that if the US Federal Reserve (the Fed) cuts rates too early, inflation could gain fresh impetus, given the persistent strength of the US economy. Mindful of that risk, the Fed could disappoint investors by easing monetary policy more slowly than expected, in Antipodes’ opinion.

Over the start to the year, the consensus outlook has shifted from 140 basis points (1.4%) of rate cuts in 2024 to closer to 80 basis points (0.8%). So, in Antipodes’ view, investors need to be open-minded to rates remaining higher for longer.

That prospect raises a second concern: while the US economy has remained resilient, the threat of tighter monetary policy may not have passed. The US economy could still experience a downdraft in economic activity.

Antipodes has also selectively added to global cyclicals with attractive long-term supply and demand dynamics that are showing bottom of the cycle characteristics such as inventory destocking, low levels of inventory and weak pricing, and are priced on low valuation multiples.

If it becomes more apparent from the data that the Fed can achieve a soft economic landing (where inflation cools and interest rates fall while a recession is avoided), Antipodes will further increase its exposure to mature cyclicals or cyclicals that will benefit from long-term investment trends around energy transition and supply-chain onshoring.

In particular, multinationals listed outside the US but with significant exposure to the American market are potentially an attractively priced way to play the soft-landing, in Antipodes opinion.
 

Takeover activity in global spotlight

By Catriona Burns, Wilson Asset Management

Conditions are ripe for a pick-up in mergers and acquisitions (M&A) activity globally, in Wilson Asset Management’s opinion. The WAM Global (ASX: WGB) investment team is focused on finding high-quality companies with long-term compound earnings growth trading at discounted valuations. 

Relying on M&A is not part of WAM Global’s investment thesis when choosing which companies to invest in, however many of the companies WGB owns are potentially targets for dealmakers, in WAM Global’s opinion.

Interest rates

Rising interest rates through 2022 and 2023 put corporate and financial buyers on pause as they were forced to reconsider the cost of financing deals and required returns. With interest rates now on pause and likely declining in 2024, and billions of dollars in uninvested capital, the level of deal activity may accelerate looking forward. 

Debt is often used to finance M&A activity, at least partially. A stabilisation in the level of interest rates in developed economies means potential buyers have reduced uncertainty around the cost of debt, providing comfort to move ahead on pursuing deals. In addition, with the recent stock market performance and improved company valuations, there is optionality for listed companies to use their own shares as currency to finance deals.  
 

Corporate buyers

Boards and CEOs have managed through an extraordinary period since the beginning of the COVID-19 pandemic. Initially, it was about battening down the hatches and keeping businesses afloat. Then after the re-opening, it involved managing through a supply chain crisis, generational high levels of inflation and elevated interest rates. Broadly, boards and management are now in a position to look forward and consider how to shape their businesses for the future.

The average tenure of a Fortune 500 CEO is seven years and the vast majority of them are incentivised to grow [their organisation]. They will likely only be patient for so long. Whether it’s the pressure to maintain growth amidst a slowing macroeconomic backdrop or the pressing strategic need to adapt and transform business models in a rapidly changing business landscape, M&A activity will be central to strategic choices. 
 

Financial buyers

In WAM's view, private equity players, often reliant on debt financing and on the ability to exit existing holdings, have been a little slow and more cautious to re-enter the market. However, WAM understands that they also have plenty of dry powder, with private equity capital available for new investments, ready to be deployed.

During the last few years, WAM has observed that private equity companies have been very successful at raising money. Institutional investors have allocated more funds towards private market opportunities, chasing returns in a low interest rate environment. There is $US2.59 trillion in cash globally, available for investment, according to S&P Global Market Intelligence, and that cash is ready to be deployed.

Acquisition targets are more likely to be small and medium-size (SMID) businesses because they are easier to integrate and those deals tend to be less complicated in nature, in WAM Global’s opinion. Further, valuations are attractive in the SMID part of the public market, meaning deals can be earnings accretive and better able to hit key performance indicators (KPIs) such as revenue or cost synergy targets.

A stock picker’s market

In environments such as these, individual stock selection remains key, and WAM Global remains disciplined in its approach of buying undervalued growth companies with a catalyst to unlock value.

WAM Global’s investment team travels widely, to meet these companies and build relationships with the management teams, in turn providing our firm with a better understanding of the businesses we invest in. 

These are often businesses that never come up on Bloomberg screens or on newspaper websites, but are incredibly high-quality operations that have been around for many decades, just out of investors’ lines of sight.