An unprecedented level of disruption has created compelling investment opportunities for those who know where to look, notes Jeremiah Buckley, Portfolio Manager on the Janus Henderson Balanced team.

The pace of change today has never been greater and disruption is being felt across industries and geographies. While presenting risks, this has also unearthed new and exciting opportunities. For both equities and fixed income, we are keen on a few themes such as the uptick in global travel, the transition to cloud computing and the rise of Software as a Service.

We have talked a lot about the growth in global travel over time, which we continue to believe is an attractive area of opportunity, as consumers all over the world continue to travel, especially in Asia. The International Air Transport Association (IATA) noted in its 20-year Air Passenger Forecast in October 2018 that current trends in air transport suggest passenger numbers could double to 8.2 billion by 2037, with China, India, Indonesia and Thailand among the top five fastest growing aviation markets.

We also believe the transition to cloud continues to be a very economical move for enterprise applications. A February 2019 update to the International Data Corporation’s (IDC) Worldwide Semiannual Public Cloud Services Spending Guide revealed worldwide spending on public cloud services and infrastructure is forecast to reach US$210 billion in 2019, an increase of 23.8% over 2018. The market intelligence company predicted the market would reach a five-year compound annual growth rate (CAGR) of 22.5%, with annual public cloud services spending reaching US$370 billion in 2022.

So we believe that the economics that the cloud provides will continue to drive opportunities, both for the companies that are providing the cloud services, and those equipment makers that are providing the infrastructure and equipment that help facilitate the growth of the cloud.

Another area of opportunity is Software as a Service, which continues to expand the total addressable market for companies that are offering subscription services.

Within fixed income, we anticipate range-bound rates and credit, but recognise bouts of volatility are likely. In our view, diversification across fixed income asset classes and a conservative credit allocation is prudent. We will continue to seek attractively valued total return opportunities, but expect carry to drive returns going forward. We remain focused on our highest-conviction names, favouring defensive business models with the potential to generate consistent free cash flow, even if a downturn unfolds. The run-up to the US presidential election in November 2020 is likely to introduce fresh populist rhetoric and new economic uncertainties. Meanwhile, US-China trade relations remain in limbo.

Risks and hurdles

Global trade tensions remain one of the biggest risks to the performance of equities. Persistent trade uncertainty may cause companies to pare capital spending. Obviously, trade wars are not good for the global economy and trade flows and economic flows. Given the strong performance of equities in the first five months of 2019, we are mindful of the risks of a potential pause or retreat. Equities have been supported by low interest rates and renewed accommodation by the US Federal Reserve, but the low-rate environment has been driven by concerns around slowing economic conditions and a general lack of inflation.

That is really the risk that keeps us up at night and we continue to keep a close eye on our exposure to equities. We would like to see progress on a lot of the trade negotiations that are happening, to help instil companies with confidence, instead of tentativeness that could disrupt the capital spending cycle.

US-centric, for now

We have the flexibility to invest in non-US markets, a tool we have utilised in certain time periods.  Regardless of domicile, our focus is always on companies with multi-national exposure. We invest overseas when we feel the risk/reward on non-US domiciled companies offer a more attractive risk/reward than their US counterparts. Given the macro weakness in Europe, we find that growth companies in the region trade at a substantial premium due to their scarcity value. Therefore, we are finding better equivalent opportunities in the US. For such companies, we are optimistic about free cash flow yields and dividend yields. The current dividend yield for the S&P500 is about 2%, which is generally an attractive level to shareholders. We think the normalised free cash flow yield is much higher than that, giving companies the flexibility to reinvest in their businesses, or think about rewarding investors. We are also seeing a very active level of buybacks, which we believe create value for shareholders.

Looking ahead

We believe there are some really attractive themes within equities and fixed income that we can take advantage of over the long term, despite rapidly shifting trends, evolving habits and geopolitical events. We believe that a detailed understanding of industries and business models, and thorough, rigorous research, can help investors to stay on the right side of change.