Investing in times of volatility: out of boredom

The unstable environment is forcing investors to rethink the attractiveness of various investments. Industrial and railway companies are expected to be among the winners.

Over the past decade, investors have been fascinated by the dominance of digital and tech giants in stock market performance.

Since the start of 2022, however, most of these stellar stocks have taken a hit. With unsustainable economic growth, soaring inflation and fears of rising interest rates, investors may reconsider their appetite for high valuations, including stocks in many of the digital platforms and software publishers they have enjoyed so far.

It has been years since we went through the investment environment. As investors continue to question the sustainability of inflation and the changing geopolitical landscape, I am looking to build an all-weather portfolio that can withstand a variety of potential risks.

That’s why boredom can be a lifesaver. Preferring companies that are both uniform and reliable, that generate strong cash flow and can continue to grow—regardless of the direction of the business cycle or macroeconomic news—can be very relevant.

Revival of North American railroads to haul raw materials

The digital future, electric mobility and clean energy must continue to be a source of opportunity for innovative companies in these sectors. Indirectly, these trends are also helping to revive old industries such as mining and rail transport.

Copper needs have been underestimated, while large volumes are needed to repair and upgrade the power grid to meet demand.

Nickel, for example, is an important component in electric vehicle batteries. Copper is needed to upgrade the power grid. And if software is gradually becoming necessary in a modern car, then automakers still cannot do without steel. Prices for some raw materials have risen sharply in recent months, a trend exacerbated by the war between Russia and Ukraine, the two main producers of nickel and copper.

Copper needs have been underestimated, while large volumes are needed to repair and upgrade the power grid to meet demand. This context could benefit companies such as Canada’s copper-focused metals and mining company First Quantum Minerals, or its Brazilian iron ore counterpart Vale.

Growing demand for raw materials and energy could be a boon for North American rail operators, which are the most economical means of transporting heavy materials. Moreover, these companies have the ability to impose their prices, which is an important advantage in the current inflationary environment.

Rising energy costs are also beneficial for these companies, as the cost differential between rail and road is the highest in recent years. A company like Canadian Pacific, which is the only one operating the coastal railroad connecting Canada, the United States and Mexico, could do well in a variety of economic conditions.

Manufacturers, drivers of a more energy efficient future

The global drive to reduce CO₂ emissions and improve energy efficiency is often linked to electric vehicles, wind or solar. Thus, through this lens, the traditional industrial firms that make machines, chemicals, and other building materials can be seen as part of the problem rather than part of the solution.

However, HVAC specialists such as Carrier and Daikin are developing systems to help reduce greenhouse gas emissions. With European regulations requiring older devices to be replaced with more efficient systems, their order books should remain filled for years to come.

In the chemical sector, tightening CO₂ emission rules and infrastructure spending in major countries could create fertile ground for Swiss company Sika. This company produces cement additives that help reduce CO₂ emissions and increase durability. Despite its monotony, this specialty has a bright future as global emission standards will only increase.

Sources: Capital Group, company reports, Refinitiv Datastream. Market capitalization in US dollars as of 03/31/2022

Dollar shops, Ali Baba’s cave for investors hunting for discounts

As the economy worsens, consumers naturally become more careful about their spending, and many turn to distributors offering bargain-priced clothing, home and hygiene products, and big brands at low prices.

With the economy slowing down, many consumers are shopping at dollar stores that performed well in previous years.

While it may seem counterintuitive, well-managed chains often have the ability to dictate their prices when inflation rises.

For example, US retailer Dollar Tree, which offers a wide range of $1 merchandise, recently launched a $5 and $1.25 merchandise campaign. The same approach has helped competing brands enjoy growing sales and profits for several years.