Looking for growth in all the right places

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The search for global stocks with high growth potential needs to be tempered by a realistic assessment of potential risks in each market, says Mark Lin, founder, chief executive officer and lead portfolio manager of Alpha-Lab Asset Management Inc. Lin specializes in diverse global, international, emerging market and Asia-Pacific equity strategies.

CFO: As a global investor, how do you balance growth potential against risk?

ML: Part of our valuation involves looking at each region, identifying growth opportunities in that market, and then balancing it against the unique risks of that market. A type of business that performs well in Europe, for example, may never have developed or thrived in another economy.

CFO: Where do you see that balance in North America?

ML: In large technology and e-commerce companies. You just don’t see companies like Google, Microsoft and Amazon coming out of Europe, where they don’t have a unified economy and that Silicon Valley risk-taking culture. These companies enjoy a unique competitive advantage versus the rest of the world precisely because of the business environment that allowed them to thrive. You can see that with dependable Microsoft and its Office franchise. The cloud services Microsoft and other cloud providers like Amazon offer also represent a low-risk, high-growth business, simply shifting computing power from your desktop or data centre to the cloud.

We also see AI — and by that, I mean the ability to train computer models to better process and derive intelligence from large data sets — driving value in these mega-cap tech companies. That could mean Microsoft using AI to provide better search results on Bing, Meta to lower the cost of customer acquisition for advertisers on Facebook, or Amazon to make more relevant product suggestions to customers. Companies such as Nvidia, which supply the technology that supports these advances in AI, are obviously going to benefit.

Some of the big players in North America’s very robust retail market, from Costco to Walmart and Amazon, also excel at what they do. Some of the specialty retailers, such as those found under TJX, like Winners, HomeSense, Marshalls and TJ Maxx are also strong, but you need to carefully pick and choose.

CFO: Where are the bright spots in Europe?

ML: Europe’s strength, first and foremost, is in its luxury industries. They know how to properly manage a luxury brand without compromise. North American companies like Coach and Calvin Klein may become successful, but when they face corporate pressure or when the inventory builds on the brink of recession, they begin discounting, which permanently damages the brand.

Companies like Gucci and LVMH, which offers Louis Vuitton, are very disciplined. They would rather destroy unsold products before diminishing their brand power by discounting them. Another great example is Ferrari. It makes something like 4,000 cars per year and trades at multiples of 48, where even BMW trades at less than six times earnings. You don’t drive a Ferrari so you can outrun a Tesla — you can’t. You drive it because Ferrari is a luxury company, not a car company.

We also sees value in European aerospace and pharmaceuticals. Airbus, for example, is really beating up on Boeing, with the Airbus 320 long range flying passengers for 10 hours now. Companies like Safran, which makes narrow-body engines with GE in a joint venture called CFM, are also driving value in European aerospace.

In pharmaceuticals, we note the European success of companies such as Denmark’s Novo Nordisk, which makes two weight loss drugs, Ozempic and Wegovy, which have become two of the most successful drugs in decades.

CFO: We’ve previously spoken with Alpha-Lab about domestic consumer-driven opportunities in India and Indonesia. Where do you see other growth opportunities in Asia?

ML: In chipmakers, such as TSMC and Foxconn, which are driving digitization around the world. While Taiwan is currently dominant, chipmakers in South Korea are also rapidly catching up.

CFO: We continue to hear about the overall growth of the Chinese economy. How does that translate into growth stocks?

ML: We currently see four major risks in that country, the first being the turmoil in the property market, which represents 25 per cent of the economy. Second, the rise of companies like Alibaba isn’t likely to be replicated under the current government restrictions placed on private enterprise by the Chinese government. Third, the emergence of China as a superpower also introduces geopolitical risk, especially in areas such as the Taiwan Strait and South China Sea. Finally, China’s population appears to be peaking, tempering domestic consumer demand. Investors may find value in individual stocks, but if you’re looking for returns in China, you should be aware of these risks.

For more information on Alpha-Lab Asset Management, visit: https://alphalabinv.com.

PBY Capital Limited (“PBY”) is registered as an exempt market dealer and an investment fund manager with Canadian provincial securities regulatory authorities, servicing family offices and their professionals. For more information, visit: www.pbycapital.com.

Alpha-Lab Asset Management Inc. is the portfolio manager of certain funds managed by PBY.

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