Strong innovators and providers of low-cost, but mission critical products and services are the best businesses to weather economic volatility.
Growth has rapidly decelerated in China and across emerging markets. There is a clear translational effect on Western and developed markets, with multinationals and the commodities complex in particular facing earnings headwinds.
We seek to participate in the long-term growth of the global economy. Selectively employing hedging techniques to reduce volatility and down market capture can be particularly useful during periods such as this, while avoiding highly cyclical businesses is prudent.
We are carefully evaluating the businesses we own to ensure they can still deliver differentiated growth in earnings and cashflow. The businesses best placed to weather the difficult economic climate can be broadly be placed into two categories - strong innovators and providers of low-cost but mission critical products and services.
A good example of the former is Japanese online marketplace Rakuten, which has disrupted the bricks and mortar retail model in its home market.
In some ways Japan's answer to Amazon, it is growing five times faster than the wider retail sector, in part owing to its innovative customer loyalty programme.
Buyers come back again and again for an ever expanding range of products and services, from clothing to credit cards and holidays. While Japanese GDP growth may only be around 1% next year, we think Rakuten is in a position to continue to grow its earnings by 15% to 20% for some time to come.
In the mission critical camp, we are looking for businesses like US-based (but operating globally) Stericyle. Originally a medical waste disposal business, Stericycle now provides a range of services that are vital to its large client base of hospitals, medical centres, research facilities, pharmaceutical companies and many others.
It operates on four continents and in 13 countries, growing share in fragmented local local markets from providers with higher cost structures and fewer services to offer.
By backing companies like Rakuten and Stericycle we believe investors can insulate themselves from some of the cold winds that are blowing through the global economy today.
Josh Rubin is manager of the VAM Focused Global Equity fund
Bull Points
• Weaker global growth expectations mean monetary policy will remain supportive for markets
• Volatility in stockmarkets provides opportunities
Bear Points
• The slowdown in China and emerging markets may spill over into DM
• Lack of a cyclical recovery and limited 2016 earnings growth could lead to deeper market declines
