This week, Opto Sessions meets Vitali Kalesnik, a partner and director of research at Research Affiliates, to discuss how inflation and Russia’s war in Ukraine will impact the markets and how to find quality stocks in turbulent times.
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Colleagues were baffled when Vitali Kalesnik, the director of research and a partner at smart beta firm Research Affiliates moved from sunny California to London.
But Europe does have some advantages over the US for investors — take environmental, social and governance (ESG) as one example. “The ESG conversation is quite a bit more advanced in Europe, compared to the United States [where] we’re seeing many of the same conversations now happening that we’ve seen a few years ago here.” In many ways, he says, Europe is “maybe half a step, sometimes a full step ahead of what’s happening in the United States”.
In 2018, Kalesnik made the move to London so he could build out Research Affiliates’ European research agenda, focusing on factor investing, smart beta and asset allocation.
Even at this moment in time, where inflation is reaching record highs and the war in Ukraine threatens the world’s geopolitical balance, he says Europe’s ESG edge is shining through. “Europe will take a lot of steps towards renewable energy, [and] I think countries will probably start using more nuclear power,” he says. “At the end of the day, Putin may have inadvertently made Europe a lot greener in the long term.”
But for investors, green energy investments can be tricky bets to call. Some of the most exciting players in the space are yet to start generating steady profits, but questions remain about how the big energy majors will shift to net zero. It’s in these moments that investors should be seeking out quality, rather than choosing between growth and value, Kalesnik says.
“Investors should rebalance into companies that are cheaper — and maybe some of the growth companies have become cheap now, for example, Qualcomm [QCOM],” he explains. “But of course, companies can be cheap for a reason.”
“Investors should rebalance into companies that are cheaper” - Vitali Kalesnik
Kalesnik’s “checklist” for identifying companies that are well priced but also have room for growth comes down to examining a business's financials. “Gross profitability or gross profits to assets ratio, for example, are some of the traits associated with better performance,” he says. “When you have a business that’s trading at a low profitability multiple, that makes for a good quality buy.”
Other numbers to pay attention to when looking at a company’s financials include investment capital and return on investment figures. As for red flags, Kalesnik says investors should try and figure out if there’s anything a company is hiding in its accounting.
“If a company has high accruals relative to their other fundamentals, like net operating assets, that tends to indicate that some of the earnings investors are seeing may not be sustainable,” he says. “Investors tend to think recent past return is an indication that it will go forward. And that can lead to bad outcomes.”
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