The global economy has proven surprisingly resilient in the face of hyper-fast interest rate increases over the last 18 months but Iain Fulton, Nikko Asset Management global equities investment director, said some kind of slowdown still seems likely.
“Higher rates will eventually have an effect but we’re cautiously optimistic about where economies go from here,” Fulton said. “We’re not seeing any underlying calamity or systemic risk.”
And with the economic wheels poised to turn slower, he said the Nikko global equities portfolio is gearing up for the regime change.
According to the July update for the Nikko Global Shares Fund, the manager has “continued to upgrade the quality of the portfolio with the threat posed to future US economic growth in mind”.
The mood shift has seen the Nikko strategy cut exposure to cyclical stocks, Fulton said, while upping the allocation to certain technology stocks and companies set to benefit from the clean energy transition among others.
“Our recent exits of industrials such as Deere & Company, Carlisle Companies Incorporated and AdaptHealth Corporation should all increase the economic and financial resilience of the portfolio,” the July fund update says.
In town for the Nikko NZ roadshow earlier this month, Fulton said, for example, that the decision to ditch US-headquartered global tractor king reflected some concern in the Nikko investment team about a softer commodities cycle ahead.
At the same time the Edinburgh-based Nikko global equities manager is bullish on the previously beaten-down streamer, Netflix.
The online entertainment powerhouse has revised its business model to include a cheaper with-ads subscription choice while also cracking down on password-sharing that allows upwards of 100 million viewers to ride Netflix for free.
“It’s expected that the ad-funded model will capture some of those who currently pay nothing,” Fulton said, in a scenario that is already playing out in the regions where Netflix has trialled the option.
He said the Nikko global shares team has also been puzzling over the artificial intelligence (AI) phenomenon that has lifted a bevy of tech stocks – notably the ‘magnificent seven’ – over 2023.
The July fund update notes the Nikko fund had “been on the wrong side of the AI boom” this year but Fulton said the technology likely heralds a long-term trend with not all winners and losers clear yet.
“We’ve done a lot of work trying to figure out what the AI change means,” he said, landing on a theory that tech follows a historic pattern dating back to dawn of the computing age in the 1950s.
“We think that every 15 years or so a new computing platform emerges that disrupts everything,” Fulton said, in series ranging from the IBM mainframe revolution in the 1950s through the PC era and into the current internet age.
While chip-maker Nividia is the undoubted early winner, he said the AI infrastructure build-out should flow through a raft of other companies such as electronic design automation specialist, Synopsys, which is in the Nikko portfolio.
However, picking what AI applications will dominate the market is another matter.
“Over the next five to 10 years there will be an AI infrastructure build,” Fulton said. “But what will the AI killer-apps be? Self-driving vehicles or maybe something that hasn’t yet been touched by tech? It could be a range of things; investors should remain cautious.”
The Nikko portfolio is also exposed to some companies set to benefit from the energy transition – again, mostly those involved in creating the infrastructure including engineering firms like the ASX-listed Worley, and US conglomerate, Kbr.
In total, the fund holds about 40 stocks in a concentrated style tilted to the quality-growth end but with a valuation lens.
Fulton joined Nikko in 2014 along with the rest of the former Scottish Widows global equities team.
Launched in 2017, the unhedged NZ version of the Nikko global shares strategy has stayed just ahead of benchmark after fees over the five years to the end of June, returning an annualised 10.28 per cent.