Which Four Stocks Are Able To Withstand Escalating Economic Risks?

Despite heightened political and economic risks around the globe today, Jacob Mitchell, portfolio manager and CIO of Antipodes Partners, looks at the four companies he believes could stand firm this year.

The US Federal Reserve began the process of shrinking its balance sheet at the end of 2017 and will continue on this path until December.

So, despite the recent dovish language of the Fed and other central banks, balance sheets have contracted 3% over the last year. Liquidity is being sucked out of the system and this is being led by the Fed.

Pairing this with recent soft manufacturing and industrial production data coming out of the US, conditions may already be too tight and the Fed may be in danger of making a policy error.

We also remain worried about the broad deterioration of corporate credit. While the stock of outstanding debt is high in an absolute sense, the growth in non-investment-grade credit is the particular concern.

Worryingly, the growth in lower quality debt has occurred in weaker businesses that are increasingly under the threat of disruption. Companies have used a low interest rate environment to take on debt, buy back stock and pay dividends, rather than invest for the future.

So, while global stocks have rallied about 20% from the December 2018 lows, we see many risks building. We still have to contend with trade war fears, European political instability and a bubble in growth stocks. 

As humans, we misjudge the likelihood and impact of rare events. Like a Jenga tower, while we may not be able to pinpoint the precise moment of collapse, we can observe building instability.

The price action in Q4 2018 is a reminder of what can happen when such risks come back to the fore.

Despite heightened risks, we continue to take advantage of the market's tendency for irrational extrapolation.