This article first appeared in The Edge Malaysia Weekly on October 12, 2020 - October 18, 2020

IT is difficult to provide investors with guidance on how the US market will perform moving forward as it remains unclear when corporate earnings will recover, says Avinash Satwalekar, CEO and country head of Franklin Templeton Asset Management (M) Sdn Bhd. There are, however, pockets of opportunity that investors can look at. These include companies that operate in the technology, healthcare and infrastructure sectors.

Avinash says there is little visibility over when US corporate earnings will see a recovery as various uncertainties lie ahead. These include the developments surrounding the Covid-19 pandemic and the upcoming US presidential election.

“The coronavirus is the no 1 issue in the market, be it the rate of infection, the progress we are making towards [finding] cures or treatments and the pace of the reopening of the US economy. These are going to be the biggest dictators of economic growth moving forward.

“Meanwhile, the US elections are getting closer and it will probably remain a tight race until election day, which will lead to lesser visibility [on where the market is headed] and more volatility. Regardless of whether a Democrat or Republican leader wins the election, it is a critical election cycle that will have significant implications on our society and economy.

“But ultimately, investors should remember that market performance and economic growth are driven by corporate fundamentals,” he says.

Avinash adds that the US equity market has rebounded from a downturn in the first quarter of this year. This rebound was due to the decisive action taken by the Federal Reserve to inject substantial liquidity into the US economy, as well as the resilience shown by companies in certain sectors and industries.

“The US equity market will likely be further supported by the pace of the Covid-19 recovery and investors’ confidence in the economic growth in 2021 and 2022, instead of near-term earnings expectations,” he says.

He adds, however, that there are opportunities for investors who can see past the near-term uncertainty and realise there are good-quality companies that they can invest in for the long term at attractive prices. Some of these companies can be found in the healthcare, infrastructure and technology sectors.

Avinash says the healthcare sector is experiencing a faster pace of innovation owing to the Covid-19 pandemic. Genomics, data analytics and predictive artificial intelligence are accelerating research and development in the biotech and pharmaceutical sectors. Virtual medicine and telemedicine — whereby medical professionals treat medical conditions without seeing patients in person — are also quickly migrating to mainstream adoption.

“We see many of these trends continuing in the years ahead and do not see much risk to such a positive outlook on the sector,” he says.

Infrastructure spending is another area that Franklin Templeton is closely monitoring, says Avinash. “Both [US political] parties are in agreement that investments in infrastructure are needed. Their areas of focus, however, could be different. For example, the Democratic Party may be more likely to drive spending on environmental policies.

“Both parties have also expressed the need to spend on improving roads, bridges and airports — things that we think of when we talk about infrastructure.

“Given the level of digital transformation that we have observed in the marketplace, technology infrastructure spending is also a priority area to support the access to 5G and data,” he says.

Technology is another sector that investors can find value in despite the political and policy-related issues in Washington, says Avinash.

“The technology sector has been at the front and centre of the market, not just in terms of how it is driving its overall performance, but also with respect to [how it is influenced by] political and policy issues in Washington. The issues surrounding the sector, which include the protection of intellectual property, has had an impact on the US’ relationship with China.

“If Trump is re-elected, such protectionist policies and posture will likely continue. In the same vein, if Biden is elected, he will likely pick up the mantle as these issues have become very widely accepted and are bipartisan issues,” he says.

Avinash adds that the firm has also sought to position its investment portfolios to benefit from developments in e-commerce, financial technology (fintech) and digital media as the pandemic has changed how consumers shop, travel and work.

He believes investors should think about how they want to position their portfolios for 2021 and beyond, instead of the next quarter. They should invest in high-quality companies that enjoy sustainable growth.

“We define high-quality companies [as those] with good balance sheets, strong cash flow and exposure to multi-decade secular trends and themes. We expect this strategy to outperform in a slower and modest growth environment that often occurs when economic growth cycles are maturing.

“Amid such an environment, investors are willing to pay a premium for companies perceived to have the ability to continue to grow their business in a slowing economic environment,” he says.

He encourages investors to take a long-term view when it comes to their investments “and take advantage of the volatility that might occur during the US election period as an opportunity to establish or increase their investment positions in quality companies”.

Avinash will be speaking on the topic of “US investment landscape ­— The shape of things to come” at The Edge-Citigold Wealth Webinar Series 2020 on Oct 17. This second of a four-part series will be moderated by Anna Taing, managing editor of The Edge ­Malaysia.

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