Fundie: It’s all about stock valuations in 2022 as momentum trading runs its course
Link copied to
Stockhead caught up with Dean Fergie, founder and portfolio manager at Cyan Investment Management to ask his thoughts on the year gone past, what to expect in the current market, and stock tips for this year.
“Last year was a really tricky market obviously, with a lot of volatility and corporate activity towards the end of last year.
“There’s a saying, feed the ducks while they’re quacking.
“As the broader market was running so hot last year, we had an abundance of new capital raising and IPOs, which probably flooded the market with a lot of stuff that was junky.
“There was just a hell of a lot of listings last year, some of which went quite well if you’re in a hot sector like batteries, but many others haven’t gone so well.
“So I think 2021 was a year where we just went with the flow and invested in things we didn’t understand, or have any view with regards to underlying valuation.
“For momentum traders, I think that’s already run its course.
“Going forward, it will be about revenues, earnings, and most importantly, the valuations of what you’re buying.”
“Everyone has been worried about inflation and interest rates rising, yes that will change the valuation of equities to a certain extent.
“But what higher rates and higher oil prices signify is a stronger economy, and that should benefit stocks especially at the smaller end.
“Obviously we can’t value those stocks as attractively compared to when rates are lower, but broadly speaking you would prefer to be valuing stocks in a strong economic environment with higher rates, than a benign one with low rates.
“Long term 10-year yields are around 1.9%, so it’s still pretty low and I don’t see how any increase from that low base is going to have much impact on valuation at the smaller end of town.
“Higher rates may potentially have some impact for larger income-based stocks like utilities, infrastructure, and banks. But in the short term, I don’t think there’s as much risk as the market believes there is.”
“The market’s factoring in rate rises in the next six months. So given that, I think you might expect to have a rate rise in the second half of this year, more or less.
“But again, my view is that I don’t think it’s something we should be too fearful of.”
“I think the market has seen so much volatility and cyclicality, so irrespective of what sectors you invest in, those can be intact for only a period of weeks, maybe months.
“If you’re just going to back reopening stocks, like hospitality and tourism stocks, you’re probably going to get that right for a period of time, and then you’re going to be completely wrong.
“My point is you can’t put all your eggs in one basket, because it’s easy to get it wrong.
“So at Cyan Investment, we’re diversified and have exposure to healthcare, financial services, and logistics.
“We’re also invested in education, gaming and of course IT, a sector which we believe is still the fastest growing area of the market.
“But we wouldn’t have more than a quarter of our overall holdings in tech.”
“They’re a games developer with a cutting edge business.
“They’ve got relationships with a number of global companies that are looking to turn their content into gaming. They’re also involved in a little bit of crypto in terms of NFTs, which they’ve released for their newly launched game.”
“We’ve got a big holding on Raiz, which is an online micro investing platform.
“They’ve got a really diversified investment framework, so when the markets were under a lot of pressure in January, the performance of their underlying funds was very strong.
“So compared to traditional fund managers or even their competitors, we really like what Raiz is doing.”
“Alcidion is a provider of hospital management software in Australia, NZ and the UK.
“It is expected to generate revenues of more than $40m this financial year across the private, public and defence sectors. With its commercially proven suite of products and financial scalability, ALC can be expected to provide significant shareholder rewards as their customer base expands.”
“They have a range of spirits and micro breweries along with a few venues.
“And they’ve developed a product called Better Beer, which is selling unbelievably well. We expect them to sell 4 million litres this financial year.
“If you look at those businesses I mentioned, we’ve technology exposure, spirits, wealth management, and hospitality, so you can see that we’ve got a bit of a diversification going there.”
“What we’re seeing is that active funds have really struggled to outperform in the markets recently, because there’s been so much volatility.
“These things move so quickly: value vs growth, tech vs old school businesses, and reopening trades vs Covid tailwind stocks.
“So it appears that a lot the active managers have found it challenging to perform well over the long term, and we’ve seen this with Magellan.
“I’ve always found it curious that people could think a handful of analysts could sit in an office in Sydney, and be able to invest globally in businesses around the world more effectively than individual managers in each of those countries.
“I find it hard to believe that Joe the analyst in Sydney has great insights into Samsung’s prospects, or possess knowledge into how Apple or Alibaba could perform.
“So in that respect, I can see why investors are moving into index funds like Vanguard, instead of paying those hefty managed fund costs.
“As far as cryptos are concerned, my observation is that it’s got every aspect of a pure speculative bubble, where people are investing into ‘assets’ that they don’t understand.
“They are entirely comfortable with investing in something with no tangible value, simply because they think they’re going make money in the short to medium term.
“Plus, I believe there’s a lot of structural issues in the crypto market, in terms of fraud and security.”
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
At Stockhead we tell it like it is. While Playside is a Stockhead advertiser, it did not sponsor this article.