Fund manager says drop your crisis mindset, look at these stocks for 3- to 5-year returns

Published Thu, Nov 25 202110:00 PM EST

Mark Denham, head of European equities at asset manager Carmignac, has picked out the global stocks that he believes hold promising returns over a five-year time period, saying that the Covid-19 pandemic has left many stocks mispriced and shortened the market's focus. Market focus has been dominated over the past 18 months by pandemic-related developments and policy responses, while inflation and supply shortages have come to the fore as global economies attempt to put the crisis behind them. However, Denham suggested that focus on these short-term external factors had clouded some of the opportunities for investors over a three- to five-year time horizon. He told CNBC last week that several European stocks present promising opportunities in a longer-term recovery. Denham manages multiple funds across Carmignac's European offerings, investing in companies that have both demonstrated sustainable profitability historically and are reinvesting those profits internally to bolster business in the future. "Typically, it leads to concentrations in health care technology, industrials, not the commodity industrials of Europe but the many niche industrials we have, like Kingspan , like Sika or other names," he explained. Consumer sectors such as luxury goods and sportswear brands are also his mainstays, and Denham highlighted Puma as a top choice to capitalize on a secular trend in leisure. Equity markets have been supported for a lengthy spell by accommodative monetary policy by central banks. Interest rates at historic lows have driven many high-profile growth stocks to all-time highs. Growth stocks are those companies expected to grow at a considerably faster pace than the market average. However, central banks have indicated that this liquidity will be unwound over the next two years, and markets have been mulling over the question of whether high inflation is "transitory" or could persist for longer than expected. Denham takes a "bottom-up" approach to investing, focusing on the qualities of individual companies irrespective of the macroeconomic environment. However, he challenged the narrative that higher rates are necessarily bad news for secular growth stocks. "They have this high sustainable profitability because of their market position, or because of some other barrier to entry. It might be a patent, it might be a disruptive technology or something, and because of their market position, they have pricing power," he said. "So in an environment of inflation, I would expect most of our names to be able to offset any potential higher interest rate effect with higher sales and profits for the same reason, really." Some consensus names, some contrarian calls Denham's fund's largest holding is Danish pharmaceutical company Novo Nordisk , a leader in diabetes treatment that has also made headway on a product to treat obesity that is selling well in the U.S. "Even though obviously the stock price has performed well, and therefore, to some extent, obesity as a theme is within the stock price, we still think analysts haven't really got their head around how big the opportunity could be," Denham said. Although Novo Nordisk is a name favored by many European equity fund managers, Denham also highlighted some less loved names, such as British contract catering company Compass Group and Spanish travel technology firm Amadeus , both of which got hammered by Covid-induced lockdowns in 2020. Carmignac's approach is that without asserting when full social and economic normality will be restored in the aftermath of Covid, it is highly likely that it will be within five years. "We want to take the opportunity to buy in at these weak levels on both of those stock prices, which we did in Q2 last year, but even though in absolute terms the stocks have risen, their performance has been quite disappointing, I would say, and hasn't yet reflected improvements in the underlying business," Denham said. "For instance, contract caterers like compass are almost back to 90% of activity that they had pre-Covid." Last week, strict containment measures were reintroduced in Germany, the Netherlands and Austria amid a record surge in Covid cases across Europe. However, Denham argued that even if their recovery is delayed, companies with competitive moats and strong fundamentals will emerge even stronger relative to their peers. Given the shorter-term stock focus in light of Covid, he argued that investors are only looking at the likes of Compass and Amadeus in terms of their current level of activity as a guide to value, rather than discounting a future recovery. Similarly, he suggested, issues such as the global semiconductor shortage and upward cost pressures on industrials due to supply chain problems are not being treated by the market as temporary issues that will last "two or three quarters," meaning investors' time horizons have become "foreshortened" over the past 18 months.

A lab technician at Novo Nordisk conducts in vitro research in Malov, Denmark.

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