Three contrarian investment ideas you need to know

Taking a contrarian perspective on your portfolio

The last few years have seen a multitude of market challenges. On top of soaring inflation, (year on year, U.S. figures reached over 9% in June 2022) ¹ hiking cycles coincided with the war in Ukraine, not to mention continued tensions between the U.S. and China, signs of emerging stress in American regional banks and a turbulent turn for commercial real estate. 

In an increasingly unpredictable landscape, it should come as little surprise that market volatility has made a return. 2022 saw the worst rout for equities and bonds in history. Uncertainty has taken hold, and as a result, many investors have switched to cash. In the last 12 months alone, client cash allocation has risen by more than $150bn.

Such dislocations have created opportunities for skilled managers, and today, we want to highlight 3 differentiated – if somewhat contrarian – investment ideas. The following strategies are what industry thought leaders chose to highlight at the 8^th edition of Portfolio Perspectives, our annual flagship investment event.

Credit tightening: an exceptional time to be a real estate lender?

Real estate has been attracting a lot of negative headlines as of late. Adjusting to higher rates, post-COVID work patterns have placed substantial pressures on U.S. offices. Though challenges persist, there’s a clear disconnect between news cycles and what managers are witnessing on the ground. With the exception of more ‘traditional’ U.S. office spaces, fundamentals remain healthy: the best spaces are achieving record rents, hotel occupancies have bounced back to pre-COVID levels and overbuilding has all but ceased ². Cashflows are also benefiting from higher inflation, and reserves are better than they were going into the global financial crisis.

While real estate essentials remain robust, it should be noted that a significant debt funding gap remains – banks are retrenching from the sector and a wave of loans are maturing. Starwood estimate $1.5 trillion of US CRED loans will mature by 2025, with 50% currently being held by the banks. Over the last decade, banks became huge players in commercial real estate, especially small and mid-sized US institutions. They now account for nearly $2 trillion of outstanding loans in the sector, more than double what is held by the larger US commercial banks. In this environment, providing liquidity is eminently desirable.

Near term loan maturity cliff:  $1.5tn of US CRE debt is maturing before the end of 2025. Share of maturing loans is dominated by Banks.³
 

Innovation beyond AI: life sciences and women’s healthcare

Perhaps unsurprisingly, AI is currently receiving a lot of interest from investors. In the coming decade, AI opportunities are expected to grow ten times over, with annual capex spending likely to generate as much as USD 1 trillion. What’s clear is that tech is no longer a standalone industry. Its span is vast, as are its opportunities across various sectors.

Outside of technology, the search for investment prospects has led Tim Woodhouse and the JPMAM team to identify potential in the life science tools sector – in particular, Danaher and Thermofisher Scientific. Tim Woodhouse, global portfolio manager at JPMAM, described these stocks as “sustaining an annual earnings growth of over 15%.” (The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell) As far as the industry goes, the sector encompasses everything from diagnostic instruments to consumables and software. In recent years, it’s faced more muted growth – driven in part by COVID and Chinese slowdowns. These conditions have created a valuation opportunity for high quality, cashflow generative companies. Driven by increased pharma R&D spend, many have pricing power and growing margins. With excellent cash flow conversion, these businesses deploy cash in value additive M&A and innovation.

Source: Tim Woodhouse, JPMAM⁴

In our ‘Healthy, Wealthy and Wise’ panel we discussed innovation in private markets, and how differentiated viewpoints can uncover unexpected opportunities. Of all areas covered, women in healthcare was highlighted as particularly overlooked.

Women make up 50% of the global population, hold half of PhDs globally, are accumulating financial assets 1.5 times faster than men, and on average, make over 80% of household purchase decisions. Despite recent shifts, female healthcare remains vastly undervalued as an investment opportunity. In 2022, investment in women's healthcare companies skyrocketed from less than $1 billion a year to an all-time high of $3.3 billion, courtesy of private equity⁵.

Why ASEAN looks attractive

India is receiving a lot of focus: its government is increasingly supporting pro-growth policies, encouraging structural reform that positively impacts companies. By 2031, India’s GDP is expected to more than double to $7.5tr, which would make it the world’s third largest economy.⁶

As for ASEAN, the region is currently experiencing structural changes that will likely have a lasting impact on the growth outlook of its economies. Take Indonesia, for example. The country used to face many logistical challenges, but in the last 7 years, 1900km of roads were built. That’s in stark contrast to the previous four decades, where new road constructions totalled a mere 780km. The commodity downstream policy added 2% of GDP⁷. Subsequently, Indonesia is now no longer in a structural deficit.

As sectors and companies adjust to the global supply chain shifts, powerful investment opportunities materialise. Vietnam is the manufacturing powerhouse for Southeast Asia, owing to its low labour costs and proximity to China. Other drivers for the region include domestic consumption stories in Indonesia, as well as a post-COVID tourism boom in Thailand.

Often misperceived as a volatile, risky region, misconceptions have long sullied ASEAN, leading to fewer inflows when compared with Japan and India. Thankfully, this is slowly changing as more growth opportunities emerge. Rooted in justifiable concerns,many ASEAN apprehensions date back to 2013, when quantitative tapering took place. During this time, the Indonesian currency was depreciating by 60%. Today, that’s no longer the case. Throughout the recent fed tightening cycle in 2022, the Indonesian currency remained relatively stable: a direct result of the economy resolving its deficit issues.
 

Supply chain diversification is already a concrete story in ASEAN where the share of global FDI flows went from 5.8% in 2015 to 13.7% in 2020⁸
 

In the 8^th Edition of our flagship Portfolio Perspectives conference, we heard from various thought leaders across the industry. Unearthing exciting investment opportunities across real estate lending, AI, non-tech innovation and ASEAN equities, Paulin Ng’s contention that ‘ASEAN is an unappreciated opportunity’ was afforded real credence and credibility.

As we look toward the future, it’s clear that many exciting, unconventional prospects remain untapped. Discover how J.P. Morgan can harness this potential, and help facilitate your wealth aims. Reach out to one of our advisors today.

¹ PMAM Guide to the Market

² Starwood, Portfolio Perspectives conference, 2023

³ Source Bloomberg Finance LP

⁴ JPMAM September 2023

⁵ JPM, Portfolio Perspective 'Healthy, Wealthy and Wise' panel, Sept 23

⁶ Whiteoak, Sept 23

⁷ JPMAM Sept 23

⁸ PMAM Sept 23