When uncertainty is the only certainty
QuayStreet Asset Management, 12 March 2021
One can only marvel at the wave of euphoria that has gripped share markets following the announcement of vaccine rollouts in late 2020. But is the so-called ‘vaccine bounce’ sustainable and what investment opportunities lie ahead as the global economy enters a recovery phase?
“The globe has settled into a K-shaped recovery where everybody realises we’re going to come out of it. But some sectors, such as tourism, will not recover at the same rate or they will continue to remain structurally challenged” says QuayStreet Investment Manager Andrew South. For instance, what are the economic consequences for New Zealand if we don’t keep up with the world, and particularly with Australia, in the race to get people vaccinated and to reopen borders. “We don’t want to be an island with a delayed vaccination strategy” he says.
At a time when most institutional managers are ‘locked and loaded’ in shares, fellow QuayStreet Investment Manager James Ring thinks that markets have got ahead of themselves. He’s sounding a note of caution. “They’re all playing offence, but defence is actually where the value is now. All the defensive names are representing pretty decent value – so that’s an opportunity.”
Ongoing monetary and fiscal stimulus by central banks and governments has also fuelled the euphoria. “The feeling in the markets is that the central banks have got their back and the government’s got their back, so what could go wrong?” says James.
Upgraded growth forecasts from the IMF and World Bank are all very well, but James says that most economies are still “way behind” in GDP terms from pre- COVID levels and he questions the current narrative about pent up demand fuelling future growth. “You’ve had an enormous pull forward of consumer spending, but now consumers are trying to save more so that could be a notable drag on GDP in our view.”
Believing that the only certainty is uncertainty, Andrew says there are still many unanswered questions about how effective the various vaccines will actually be, the rollout timeframes and how permanent some of the pandemic-driven structural changes may be. “Some of the structural imbalances create opportunities for active managers”, which is why he says that QuayStreet is “sticking to our knitting” when it comes to picking stocks and using our experience.
As a specialist in international equities, James has his eye on a handful of key market trends including the pickup in some emerging markets in Asia and Russia. However, he says one of the more powerful thematics has been the increased spending on renewable energy by the European Union and a similar commitment from the Biden administration. “Companies that are at the forefront of building green energy are going to continue to do well, and I think food, which has been a thematic for a while, is turning out to be extremely powerful.”
QuayStreet also believes that the current investor rotation away from high performing technology stocks may be premature. “Some sectors are very frothy, but you’ve just got to manage your way around that” says Andrew, adding that diversification is still important when it comes to portfolio management. “You’re really looking for stocks that have good revenue growth or pricing power above inflation.”
As for the ‘crowd trading’ frenzy that surrounded GameStop in the early part of the New Year, Andrew points out that this was really only a peculiar and targeted rush on small US companies that were heavily “shorted” i.e. essentially many investors betting that the share price will continue to fall. Such peculiar short-term market anomalies do appear over time, where stock prices can deviate substantially from fundamentals. While QuayStreet did not have any exposure to GameStop, such events may present opportunities for active managers. “When you’re focusing on the discounted value of cash flows and what companies are actually worth, rather than noise about longs and shorts, then volatility may provide opportunities.”
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