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Beware of the blue-chip bubble and turn to healthcare tech, says portfolio manager

Beware caution

As we see volatility across the Australian markets of late, investors will be looking for places that offer security while allowing for growth. Jun Bei Liu, portfolio manager at Tribeca Investment Partners, explains why she finds healthcare growth stocks particularly interesting, and why she recommends avoiding the safe haven of Australia’s major sector blue-chip stocks.

The appeal of technology healthcare stocks

Ms Liu said uncertainty among investors is predominantly impacting the once extremely popular high-growth sectors the worst.

“Essentially, investors are very concerned of where the market might go to, given the volatility of what we have seen. Right now, we don’t have much positive news on the horizon for investors to really feel confident to step into the market to buy, and this is the same across equities and other asset classes as well. A lack of confidence is essentially what we’re seeing,” she said.

“Over the last few years, we’ve seen a lot of money flowing into those high growth sectors, such as technology and the like, and it has been these growth sectors that were most heavily hit.

“It is important at this time to be looking for companies that have long-term growth drivers and very strong business models, rather than banking on companies that will have a good earning for a year and then, potentially, will taper off. As well as this, be wary of companies that are very exposed to trade, which will have a much higher risk associated with investment.”

She said despite this sentiment, there are still areas of opportunity among growth stocks, namely the healthcare technology and biotechnology sectors are of particular interest.

“I would stick with companies that don’t really need global growth to pick up. Generally, companies like technology healthcare are a good place to be. Especially as they’re now at very attractive entry points,” she noted.

“Some of these quality technology healthcare companies are looking far more interesting now at the current level, with their earnings still doing quite well despite them being at this cheaper price point.

“People should pay a lot more attention to some of the quality medical or biotechnology growth companies, those that are best in their fields are seeing share prices has come off quite drastically in the last few months. These are the companies that people are looking at building positions in.”

However, Ms Liu acknowledged that investors need to be prepared to invest for the long term when incorporating such growth stocks into their portfolios.

“The world is no certain place. We’ve got the trade war, Brexit, we’ve got Italy issues, we’ve got a US slowdown, so the confidence level is low. People should be picking quality names as something to put their money in for the next 10 years,” she said.

Beware of the ‘safety’ of blue-chip stocks

Although Ms Liu acknowledged the appeal for Australian investors of turning to the banks in times of volatility, she said they must be aware of the inherent risks associated with the sector.

“There is a shift into blue chip as people are becoming more cautious, but you have to be very careful where you’re putting your money,” she said.

“Most people have their investments across banks. Now, banks are stable in the short term as they’re offering dividend yield and the impact of the royal commission is yet to come through, but it is a sector that is overallocated and it has a risk if our economy does slow down drastically. Banks are very much leveraged to that front.”

Ms Liu recommended reducing investment in the sector, as the next year’s events shroud the banks in uncertainty.

“I would actually reduce holdings in banks. It looks defensive in the short term, but next year the real impact of the royal commission will come through, earnings are not going to grow, margins will come off, we’ll see increased costs, and our economy direction will be vital for those companies because they’re so leveraged,” she said.

Ms Liu warned investors about heavily focusing on the mining sector, also, as the impact of the US/China trade war cannot be predicted at this stage.

“Your other standard blue-chip stock is on the mining side. I’d be cautious here, also, because that will be impacted by the likes of the trade war and where China might go,” she said.

“The big miners actually held up quite well during this volatility, but I would be a little bit careful in terms of allocating into those spaces because they will be the more volatile if there was a negative, or indeed no, outcome from this trade war.”

Predictions for the coming weeks

Ms Liu said the market is hanging in the balance over the potential of a US/China deal being signed at the G20 summit in Argentina next week.

“I guess, for the equity market, they’re looking for a catalyst and one such catalyst could be the trade deal at the end of this month. It could really go either way,” she said.

So far, the commentary has been reasonably reconciliatory on both sides, and the market will have a sigh of relief if there is some sort of agreement that comes through. We will see that as quite a big support for the market to go higher if the deal comes through.

“If it doesn’t? The market is just going to tread sideways and it’s going to be very challenging to drive it meaningfully higher.”

Beware of the blue-chip bubble and turn to healthcare tech, says portfolio manager
Beware caution
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