Look beyond rosy growth numbers, manager warns

Rising rates, trade wars cause concern for Black Creek's Richard Jenkins.

Jade Hemeon 20 September, 2018 | 5:00PM

Richard Jenkins, lead manager of CI Black Creek International Equity, sees a shadow when he looks at the sunny economic growth numbers in various regions around the world.

While growth continues in Europe, Asia and North and South America, a credit-tightening phase has begun in the United States and, more recently, Europe. The U.S. central bank has already raised rates twice in 2018 and is expected to do so two more times this year.

Rising interest rates are often poisonous to robust economic growth as borrowing money becomes more expensive, demand for goods and services falters along with corporate expansion plans, and interest-paying investments become more attractive to investors and pose greater competition to stocks.

"I've never seen a period where credit conditions get tighter and it doesn't cause a problem somewhere in the world," says Jenkins, chairman and managing director of Toronto-based Black Creek Investment Management, subadvisor to the fund for CI Investments since 2008. "Things can happen in different places for different reasons. But already the tightening in U.S. credit has led to a rising U.S. dollar, putting pressure on emerging markets currencies and economies."

Black Creek International Equity invests in companies anywhere outside of North America. Some of these companies could also be affected by the outcome of tariff and trade disputes between the U.S. and various trading partners. Global trade is an area of uncertainty and risk, Jenkins says, and he expects more threats, tariffs and trade barriers, as well as backlash against American companies and resultant stock volatility.

"Many businesses that exported their way to prosperity in the past will have to regionalize their businesses," he says. "It's rare for us to own export-dependent companies, we'd rather own those that have globalized their business and do well in the regions in which their operations are based."

While Jenkins says it's difficult to see how trade negotiations will unfold, he is looking at every business in the portfolio with a view to how it could be affected by a slowdown in trade. His focus continues to be on running a focused but well diversified portfolio, with best-in-class companies that have a distinct proprietary advantage and are able to withstand an economic downturn.

"If political leaders start throwing up tariffs and saying the other guy is cheating, that could be negative for the global economy and stock markets," he says. "However, if there is a rebalancing of production and consumption globally, that could be a good thing."

An example in the fund of the type of company he likes is Daikin Industries, the world's largest manufacturer of air conditioning equipment and leader in ductless air conditioning. The multinational company is headquartered in Osaka, Japan, but it has manufacturing operations outside of its home country in various markets where it sells its products, such as the sweltering state of Texas.

"We look for companies that are market share leaders in their field and that continue to win customers, and we like to get them at significantly discounted prices," Jenkins says.

At the same time, he's staying away from companies that he views as overpriced. For example, in recent years many investors turned to secure, dividend-paying companies as a source of income when interest rates are low, but with rates notching upwards these expensive stocks are vulnerable to further correction, he says.

Tech giants such as the U.S.-based FAANG stocks and their counterparts in China, have led the markets upward in recent years, but Jenkins says their rich valuations remind him of the tech boom and bust of the late 1990s.

"It's different this time, because there are real companies with real earnings and not just dreams," he says. "Tech has been one of the few outperforming areas, but we're staying away from those businesses. It's not that we wouldn't ever want to own them, but not at these prices."

A recent addition to the portfolio is Tate & Lyle (TATYY), a British-based multinational agribusiness that makes food ingredients such as sugar and salt replacements. He's also purchased Glanbia (GLAPY), an Irish market leader in global nutrition with strong brand recognition in cheese, diary ingredients, specialty non-diary ingredients and vitamin and mineral products.

Glanbia is a leader in converting milk to other products such as whey powder, which is used in baby food and pharmaceuticals, as well as sports nutrition products such as protein bars and energy drinks. It also supplies concentrated nutritional products for seniors, which Jenkins regards as a growth business due to an aging population in many developed countries.

Another important UK-based company in the portfolio is BAE Systems (BAESY), which operates in the defense, security and aerospace industries, and makes large ships, submarines and fighter jets. The stock price fell in the wake of the Brexit vote and presented a buying opportunity. Jenkins views the company as attractively priced relative to U.S.-based defense stocks.

On a sector basis, Black Creek International's biggest weighting is in financials, accounting for about 18% of fund assets. Holdings in this area include ICICI Bank (IBN) of India,  Lloyds Banking Group (LYG) of London and Santander Mexico Financial Group.

The fund also owns a couple of insurance companies, including FBD Holdings, a general insurance company based in Ireland, and Assicurazioni Generali (ARZGY) of Italy, the country's largest insurance firm.

Jenkins says Assicurazioni Generali is a leader in providing insurance where rates are based on digital monitoring of the client to assess their abilities at healthy living or driving. It also has a profitable business providing roadside service to drivers.

"Monitoring is catching on in Asia and Europe, although it's still early days in North America," Jenkins says. "It can measure behaviour, so that the people who live a healthy lifestyle don't have to subsidize the insurance of those who do not, and the good drivers don't have to pay for the bad. It gives the lower-risk people a better deal on insurance."

Earlier this year Jenkins sold the fund's position in Accor (ACCYY), a French hospitality company that owns or manages various hotels and resorts worldwide, including chains such as Novatel, Sofitel and Fairmont. The stock was bought when the hotel business cycle was down and sold when the cycle turned and its stock market valuation rose.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Accor SA ADR8.49 -1.58
Assicurazioni Generali ADR8.85 -1.45
BAE Systems PLC ADR26.82 -1.79
Glanbia PLC ADR55.30 -7.06
ICICI Bank Ltd ADR11.17 USD4.59
Lloyds Banking Group PLC ADR2.38 USD-0.42
Tate & Lyle PLC ADR33.89 -0.98

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Jade Hemeon

Jade Hemeon