Outperforming asset manager picks the stocks set to win as margins get squeezed

Profit margins are getting squeezed as inflation remains at elevated levels, with a slew of companies — including Walt Disney , PepsiCo and Spotify — all warning of margin pressures, casting a pall over earnings growth in the quarters ahead. Patrick Armstrong, chief investment officer at Plurimi Wealth, believes this is the “biggest risk” for equities looking ahead. He said that market expectations for S & P 500 earnings next year looked too high, given the looming pressures. “[Earnings] downgrades may be massive. Consensus is still too high. Margin squeeze is [the] biggest risk for equities,” Armstrong said in notes shared with CNBC. “I don’t think we’re going into an environment where companies will have the same kind of pricing power that they have enjoyed this year,” he added on CNBC’s Pro Talks Wednesday. “Consumers are going to have their purse strings pulled by utility bills, higher mortgage costs, higher petrol prices, and there’s going to be margin squeeze.” It comes after John Waldron, Goldman Sachs’ president and chief operating officer, told CNBC last month that inflation is the ” single biggest issue we all have to tackle right now.” He said wage pressure and higher commodity prices were particularly challenging and could eat into companies’ margins. But some companies could buck the trend, according to Armstrong, whose Plurimi AI Global Equity Strategy fund beat the MSCI World index to rise 8.2% in October. “Own sectors with defendable margins or that are creating margin squeeze elsewhere,” Armstrong said. Agribusiness One sector that the asset manager likes is the agribusiness sector. “Consumers are going to face difficult choices on where they spend, but eating will be one thing they’re always looking to spend money on,” he said. His top picks in the space are food processing firm Archer-Daniels-Midland , fertilizer maker Mosaic Co ., agricultural chemical and seed company Corteva , as well as farming machinery manufacturer Deere & Co . “I think grain prices probably are going to continue to move higher. And farmers are going to find every acre of arable land they have. So more pesticides, more fertilizers, more intensive farming and cash flow to buy farm equipment as well,” Armstrong added. Health care He also likes health care, which he described as a “very stable” sector with “predictable cashflows.” It is also trading at reasonable multiplies, he added. His top picks in the space are Swiss pharmaceutical firm Roche for its “stable cashflows” and “attractive” yield, as well as Denmark’s Novo Nordisk for its leadership in the diabetes treatment space. Luxury Luxury stocks are another favorite for Armstrong. “Luxury consumers aren’t suffering the same headwinds that mass market consumers are suffering. [They are] not pinched by utility bills, petrol prices and mortgage costs,” he said. Moreover, the “massive” profit margins of luxury companies are also insulated from increases in input prices, he added. Within the space, Armstrong’s fund owns French luxury goods companies LVMH and Hermes , given their “defendable margins” and the ability to be price setters. Energy The energy sector may be the best performing sector by a long way this year, but Armstrong believes some energy names are “still cheap.” His top picks are refining firm Equinor , shale operator EOG Resources , as well as BP and Shell . He noted that the firms are “paying down debt, buying back shares and [distributing] dividends.”