A hurricane is bearing down on our economy, but perhaps this is also the right time to invest

Yesterday, out of the blue, the CEO of the leading Western bank, J Dimon, warned of a storm on the horizon for the economy. Two weeks ago, one of the world’s two largest fund management firms, Blackrock, did something similar. But this comes at a time when we’ve taken a massive hit on the stock market and the share prices of the companies of the future have been left in tatters. Technology and pharmaceutical companies appear to be the two sectors singled out. Each for a different reason, but both because they share a future scenario of value appreciation. And undoubtedly the star, the stock that should be in every portfolio – at least in conservative ones – is Air Liquide. A traditional company where its management has instilled a value that the market has learnt to recognise.

By Miguel Ángel Temprano

3 June 2022 Reading time: 3.50 mins

Throughout my already long professional career, there isn’t a single person or journalist who doesn’t ask me time and again where one should invest. It’s always a tricky question to answer, but in recent months it has become impossible because, for a fund manager, it’s always very difficult to say that the best option at that moment is not to invest in anything at all, but simply to sit on the sidelines.

“Time and again, everyone who knows me asks me what to invest in, but age and experience have taught me not to lie”

And this is because most people do not realise that you are not a magician but a scholar – someone who bases the vast majority of their investment decisions on in-depth analysis of securities, macroeconomics and geopolitics.

If you say we have to sit still, it comes across as though you’re a poor professional, that you haven’t got a clue about the subject and that’s why you’ve got no ideas. But anyway, that’s the way it is, and for many years now – not just for the sake of investors, but for my own sake as well – I’ve decided to always tell the truth, regardless of the reaction that truth might provoke in others. And I must say, it’s worked out well for me.

I may have been one of the first to do so, but I was certainly one of the first to say so publicly, when in November – in light of the US intelligence report on the build-up of 100 Russian tactical battalions on the Ukrainian border – I decided to move my funds into almost entirely liquid assets. Undoubtedly, in the long run this proved to be the right decision – one which my colleagues, upon leaving the firm in January, did not fully carry through; and I am sure they did so not because they did not think it was the right thing to do, but for the reasons I have outlined above.

“In early November 2021, following reports from the US intelligence services about the build-up of troops, I converted my investments into cash”

The markets have literally plummeted. We are experiencing a period of stock market uncertainty, accompanied by dire macroeconomic prospects. Last week, the world’s leading index, the S&P 500, rose on a weekly basis for the first time after seven consecutive weeks of decline. Only once in modern history has the market fallen for a further week – that is, for eight consecutive weeks. But the worst thing is that, for the first time in many, many years, this fall was accompanied by a fall in the Bloomberg index, which tracks fixed-income securities. Nothing like this had ever happened in any previous crisis.

A few days ago, the director of one of the world’s two largest investment fund management firms by assets under management predicted a stock market crash in the short term. Today, J Dimon, the CEO of the leading Western bank, JP Morgan, has announced – not merely speculated – an imminent economic hurricane.

“J. Dimon, CEO of JP Morgan, has today warned in the WSJ of an impending economic storm. Let’s get ready.”

Despite everything, the slump in share prices over the past few weeks has just opened up investment opportunities. Not huge ones, but significant nonetheless. This appears to be a stark contradiction when we consider what is happening at both the macroeconomic and geopolitical levels. But that is how it is.

A stock market investor is neither a poker player nor a roulette player. An investor must be someone who believes in the companies whose shares they buy, because that is what shares are. That is why I am so critical of quantitative funds. But that will be the subject of my next article.

“Never before has fashion been shown to be so fleeting. Tech gadgets, once a must-have in every handbag, now seem to be cursed.”

Tech companies, which have been all the rage in recent years and have been rewarded with staggering and clearly unjustified rises in share prices, have seen their values plummet. No doubt this has cost more than a few people a fortune.

But companies – and these are just like any other companies – spend their days running their business, not watching the stock market screens. The odd executive might do that, but a company is much more than that.

I don’t think anyone would doubt at this stage that the world is changing at breakneck speed. Towards a technology-driven world, where data is the most valuable asset. Well, none of this has changed in the last six or seven months. Perhaps one or two companies have expanded a little too far and are now paying the price, but the ultimate aim of the company has not changed in the slightest.

Obviously, buying a share trading at 100 times its profits is madness now, but it is madness now and it was madness a few years ago, when it seemed perfectly normal to us. Perhaps paying 50 times is still expensive, but let’s look at the following figure. Depending on whether we’re talking about Europe or the US, the average P/E ratio is between 14 and 19 – in other words, paying between 14 and 19 times a company’s current earnings. It does not seem unreasonable to think that paying 30 times a company’s earnings for a market leader in a rapidly changing sector is an aberration.

Well, we have already found technology companies whose shares are trading at those prices or even lower. Of course, buying these shares now does not guarantee that they will not continue to fall, but it does guarantee that, over a two- to three-year period, they will rise significantly in value.

But there are also other companies – the ‘classic’ ones – that are worth studying. And now I’m referring to my favourite company. All fund managers have a stock they like more than the others, and there’s always a reason for it. In my case – and this is just a bit of trivia – it was the first company I analysed in depth, and that is Air Liquide: the French industrial and medical gases company.

“Air Liquide is a prime example of how management is just as important – if not more so – than its products in many cases”

I don’t usually do this, but this time I’m going to include two charts showing the share price trend: one covering one year and one covering five years.

How is it possible that the share price of a company which supplies a product used in the manufacturing chain or in a hospital remains unaffected by the economic downturn?

It’s not easy to answer that question, but in my articles I neither lay down rules nor go into great detail, so I’m going to summarise it in a simple and straightforward way.

The company’s philosophy, established by its senior management, is adhered to as if it were dogma. They do not allow controlling shareholders to alter the business strategy. They are innovative to the utmost, but not for the sake of it; rather, because this ensures their business is always at the cutting edge. However, they make no mistake: when a new line of business is necessary to meet their objectives but is not part of their ‘core business’, they sell it off.

Their business is gas, and nothing else. This innovation leads them to a situation that I would like to see not just for companies in my country, but for my country itself: patents are part of the company’s objectives. They pride themselves on patenting at least one idea or product a day. Yes, you read that right – one a day.

All of this makes the company a stronghold, capable of weathering any storm, and the market recognises this; its owners – that is, the shareholders – are unlikely to sell their shares, thereby preventing them from falling in times of uncertainty.

And finally, let’s talk about laboratories. Whilst Air Liquide is my favourite stock, laboratories are my sector. There’s another reason for this: as my readers know, I’m also a molecular biologist, and although it’s been an age since I practised, I’ve never regretted having studied something at university that not only fascinated me, but which I’ve kept up to date with all these years.

“COVID has opened many people’s minds. Medicines save lives, but without research there are no medicines, and it is mainly pharmaceutical companies that carry out that work”

Well, during the pandemic I said that our mistreatment of the environment had not created more pathogens, but had damaged our defences, making us more vulnerable to them. Restoring the environment is on every government’s agenda, but always for tomorrow, never for today, which means that pharmaceutical research is now more necessary than ever.

Pfizer, which features in all industry rankings as one of the five largest pharmaceutical companies in the world. Before the COVID-19 pandemic, it had a turnover of around $40,000 M. In its 2020–21 financial year, that $40,000 M grew by 10 per cent, which isn’t bad, but the fact is that the COVID-19 vaccine brought in an additional $23,000 M. Anyone would think this was like winning the lottery – a once-in-a-lifetime windfall – but that’s not the case.

Whether we like it or not – and I say the latter because, even now, after everything we’ve been through, there are still deniers – we are becoming increasingly aware that medicines, including vaccines, save lives – many lives. And that getting vaccinated is not only a good thing, but a blessing, however much it may upset us.

Well, just take a look at Pfizer’s share price and you’ll see what I mean.

Well, just like Pfizer, there are many other pharmaceutical companies which aren’t exactly set to make a killing; rather, although all governments – including the US administrations under Obama and Trump in their day, and under Biden now, as well as any of the serious European governments – have set out to negotiate lower pharmaceutical prices, this industry possesses an intrinsic value derived from the fact that it is essential to our survival as a species.

In short, the time may have come for a fund manager like myself to shift away from the pessimistic tone adopted over recent months, and start advising investors to gradually build up their portfolios, with shares that have either fallen sharply and represent the future – such as certain technology stocks – or with sound, stable companies whose future viability is beyond doubt.

But I’m not just playing it safe – every investor has plenty of sleepless nights, so if you do decide to take my advice, don’t check the share prices for a while.