Fund manager says a recession is ‘imminent’ — and names cheap stocks to play it
Recession fears are on the rise once more, as concerns grow that the U.S. Federal Reserve’s fight against inflation could push the economy into a prolonged slowdown. The yield curve is already signaling that a recession could be on the horizon. “The bond market is saying that a recession is imminent. I think that’s pretty clear,” fund manager Steven Glass told CNBC’s “Street Signs Asia” Monday. “Given the extreme inversion of the yield curve between the 2 and the 10-year [Treasuries], it is slightly less inverted than over the past week but it is the most inverted that it has ever been, which in every single recession in the past 30 years has been preceded by an inverted yield curve. So, we think the bond market suggests that could likely be a recession in probably the next year,” Glass added. An inverted yield curve occurs when interest rates on shorter-term U.S. Treasury bonds are higher than longer-term ones. Glass, managing director at Pella Fund Management, also highlighted several risks to the economy, such as the “vulnerable” consumer and continued wage pressure in a U.S. labor market that is at its “strongest in at least fifty years.” Stock picks So how should investors position against such a backdrop? With inflation likely to remain higher-for-longer in the near term and companies facing earnings pressure, Glass said he is focusing on companies with earnings visibility. “Pella is emphasizing investing in companies with relatively high certainty of earnings and are trading at attractive valuations relative to those earnings,” he said. He likes companies with “large and guaranteed” order books, such as Dutch semiconductor equipment maker ASML and healthcare solutions provider IQVIA , as well as firms with a large portion of repeat sales, such as Adobe and Swedish mining equipment manufacturer Epiroc. He also highlighted insurance broker Marsh & McLennan , which he said enjoys high customer retention rates due to the complicated nature of its services which serves as a barrier to customers switching providers. Discount retailers Glass also identified several stocks that could benefit from a “consumer trade down.” “Inflation is stretching consumers and could result in consumer trade down & discount retailers are key beneficiaries,” he said, naming Dollar General and British variety store chain B & M Value Retail as among his top stock picks. Private equity firm 3i Group makes the list too, for its investment in European discount retailer Action. Glass is also a fan of semiconductor powerhouse Taiwan Semiconductor Manufacturing Company . The chip maker, which counts Warren Buffett’s Berkshire Hathaway among its top shareholders, has “strong structural tailwinds” and is the “undisputed leader” in its field, he said. The company also has a “superb track record” of growing its return on equity and has “very good value” at its current share price, he added. Google parent Alphabet also makes his list. The stock looks “extremely cheap” and has “huge margin potential,” according to Glass.
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