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A recession is looming, inflation looks likely to continue and it’s “critical” for investors to be looking at valuations right now, says Steven Glass, managing director of Pella Funds Management. “There’s so many signals of a recession. I mean, this inversion is huge. I don’t think people realize just how inverted the 2-10 year [Treasury yield] is at the moment, which is really historically a strong signal of an imminent recession,” Glass told “Squawk Box Asia” on Monday. Against this backdrop, he advised investors to be “hyper-vigilant about valuation.” This is not the same as just buying value, he said, or choosing firms trading at low multiples. Rather, investors should look to buy stocks at a low multiple relative to their growth outlook, Glass said. “Valuation has … never been more important. It is just critical at the moment,” he said. “We’ve gone through an extended period where valuations didn’t seem to matter. Things were traded on crazy multiples of revenue. And if you just bought on momentum you did really well.” But now, valuations will get pushed down if earnings downgrades and interest rates continue to go up, Glass warned. ‘Cheap’ stocks to buy In this environment, Glass selected nine stocks that he said, “look particularly cheap given their growth outlook.” These include Alphabet , BMW , U.S. healthcare firm Cigna , U.K. sports fashion retailer JD Sports Fashion , Hong Kong-listed Ping An Insurance , and French construction firm Vinci . Discount retailers are also key beneficiaries of the potential recession and ongoing inflation, which will see consumers continue to trade down, Glass said. His favorites are major U.S. discount retailer Dollar General , investment company 3i whose largest asset is European discount retailer Action, and B & M Value Retail. Glass says that Dollar General is one to own because it is “recession and inflation resistant” — with strong same-store sales growth during the 2008 global financial crisis and the Covid pandemic. On 3i, he noted that Action accounts for 50% of its investment portfolio, and the discount retailer is a “beneficiary of rich-poor divide” and consumers trading down. He also said that Action is “recession and inflation resistant,” with an attractive valuation at a more-than 20% discount to its net asset value.
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