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Leading fund manager reveals 7 investment themes from 2018

Leading fund manager Julian Beaumont from Bennelong has identified seven interesting investment themes from 2018.

Let’s get straight to it:

When good economic news becomes bad news for stocks

In previous years bad economic news resulted in quantitative easing which pushed up valuations.

However, US economic strength is now seeing quantitative tightening and rising interest rates which will hurt valuations. But, a strong economy should hopefully mean growing profits which would mitigate the effects.

Value versus growth

2018 has been a battle between value and growth. For several years growth shares have clearly won, with banks like Commonwealth Bank of Australia (ASX: CBA) underperforming CSL Limited (ASX: CSL) and A2 Milk Company Ltd (ASX: A2M).

However, low p/e shares like BlueScope Steel Limited (ASX: BSL) and Qantas Airways Limited (ASX: QAN) have been good value performers recently whilst Domino’s Pizza Enterprises Ltd. (ASX: DMP) was named as a growth disappointment by Mr Beaumont.

One business that may be able to fit the growth and value label is Macquarie Group Ltd (ASX: MQG).

WAAAX on, WAAAX off?

Some of the best performers on the ASX have been the WAAAX shares, which refers to WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU), Afterpay Touch Group Ltd (ASX: APT), Appen Ltd (ASX: APX) and Xero Limited (ASX: XRO).

Mr Beaumont described them as potentially terrific businesses that are globally scalable. However, he thinks the valuations may be getting ahead of themselves due to the focus on revenue rather than profitability.

Rise of capital-light businesses

CSL, A2 Milk and Aristocrat Leisure Limited (ASX: ALL) are ASX examples of capital-light businesses that are valuable because of their brands, intellectual property or other smarts. These businesses are climbing up the market cap rankings.

At one point CSL was the second largest listed business on the ASX for a short time.

Servicing seven billion people rather than 25 million

The ASX businesses that are capital-light have mostly managed to export their competitive advantage, through their brand or patent, and turned it into profitable growth overseas.

CSL and Macquarie are two blue-chips that have triumphed overseas whilst the WAAAX shares are some of the best examples of overseas growth in the smaller cap space. currency movements have also helped somewhat.

Shredding and bulking up

Many of Australia’s leading domestic businesses like Commonwealth Bank, Telstra Corporation Ltd (ASX: TLS), Insurance Australia Group Ltd (ASX: IAG), Woolworths Group Ltd (ASX: WOW) and Scentre Group (ASX: SCG) are mature and are constrained by their Australian (and perhaps New Zealand) operations.

Many of these businesses are divesting their problematic segments, with an aim of perhaps shrinking to greatness.

For example, the banks have been divesting their wealth and life operations. BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are divesting coal and energy assets. Wesfarmers Ltd (ASX: WES) has divested Coles Group Limited (ASX: COL) and Telstra is considering divesting its infrastructure assets.

Meanwhile, a flurry of mergers and acquisitions is hitting a record high for the year to date, reflecting boardroom confidence. Amcor Limited (ASX: AMC) and TPG Telecom Ltd (ASX: TPM) are among the biggest dealmakers.

Rising political and regulatory risks

Politicians are making their presence felt in a variety of industries.

The big banks like National Australia Bank Ltd (ASX: NAB) are hurting in the Royal Commission.

AGL Energy Ltd (ASX: AGL) is suffering from threats of price regulation.

There is a Royal Commission into the aged care sector, which has pummelled the share prices of Estia Health Ltd (ASX: EHE) and Japara Healthcare Ltd (ASX: JHC).

The ACCC and FIRB are also being more active by blocking deals.

Foolish takeaway

It’s been another interesting year and Mr Beaumont has covered a lot of the interesting themes from 2018. There’s still another month left of 2018, so volatility returning could be the biggest theme of all.

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Motley Fool contributor Tristan Harrison owns shares of Altium and JAPARA DEF SET. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of A2 Milk, AFTERPAY T FPO, Altium, Appen Ltd, COLESGROUP DEF SET, Insurance Australia Group Limited, National Australia Bank Limited, WiseTech Global, and Xero. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited, Scentre Group, and TPG Telecom Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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