Markets are adjusting for the “biggest reopening trade” since World War 2 ended, pro investor James Whelan says.
It’s been the talk of the town since bond yields jumped in late February. Now, investors are looking where to position next.
High-growth tech companies (e.g. BNPL) have been belted, while value stocks have made a long-awaited climb off the mat.
In the US, investor repositioning sparked the sharpest divergence between the tech-focused Nasdaq and the broader Dow Jones index in 28 years.
So, where to from here? Whelan said to keep in mind that it’s a rotation — not a broader equity collapse.
“It’s a matter of where you’re invested,” he said.
“There’s a battle between the bond market and that rerating of equity valuations to the downside.”
“But keep this in mind — the reason yields are rising is also tied to economic optimism. At the end of the day, more times than not, optimism will win.”
“So the equity market gets bought because optimism is there for a reason. The economy is growing, people have money, and eventually good economies are great for the markets and that’s what’s likely to shine through.”
And while Australia’s version of high-growth tech — BNPL — has been hit hard, he doesn’t view the big players in the sector as a flash in the pan.
“Part of me that thinks BNPL is part of that household narrative,” he said.
“It’s not really a new thing on the side. It’s kind of natural now for someone to use APT or ‘Zip it’. So that’s a bit different to me, but I think the water’s just got to find its level on that one.”
The reopening trade
For Whelan, a macro specialist at investment firm VFS Group, the ‘reopening’ trade was on the cards by Christmas with positive vaccine results and a new US President.
“It’s not like (the rotation) was a big surprise. Everyone was saying that when yields pop back up again, you revalue lofty growth stocks at the top of the Nasdaq,” Whelan said.
Tech companies trading at huge multiples of forward earnings are often the first in the firing line when interest rates climb.
“It’s all good when money is free but all of a sudden money isn’t as free. So you look at something else.”
Here’s where Whelan looked:
- “Long ‘value’ stocks (Vanguard Global Value Equity Active ETF)”;
- “Long the S&P600 Small Caps Index” (IJR — iShares Small caps ETF);
- “Long commodities (COMM (iShares Commodity basket))”; and
- “Just straight up inflation. (INFL — Inflation Beneficiaries ETF).”
In Whelan’s view, things are about to go boom — so invest accordingly.
“You can’t get a hotel room, you can’t rent a car, you can’t get a booking in a restaurant,” he said.
“US households are cashed up to the gills. The percentage of savings to disposable income there is at 22 per cent — it was seven per cent before COVID-19 hit.”
“Things are going to explode and I think prices for simple items will rise. Shipping rates, oil prices, food prices — all going up.”
Within his broader macro analysis, Whelan pinpointed an ASX microcap play that looks set to benefit from one of the core trends in the great reopening — oil prices.
“If you don’t own Brookside Energy (ASX:BRK) right now, then you should probably have a really good look at it,” he said.
“It’s a perfect representation of where I’m investing. Oil prices are going up and gas is going up, and I’m rotating into energy.”
“The holdings that BRK has are phenomenal. That’s the stock that’s going to make people a lot of money over the next couple of months.”
All roads lead to the Fed
As the bond selloff gathered pace last week, Australia’s central bank turned some heads on March 1 by re-upping its bond purchasing program.
Yields did fall (briefly). But “it’s already been proven the RBA is wasting it’s time trying to finagle the bond market”, Whelan said.
“They did $4 billion (instead of $2bn) the other day and it really just postponed the yield on those bonds (rising) for a couple of days.”
Instead, it’s what the US Federal Reserve does next that’s going to determine what the rest of the world does.
And Whelan’s on board.
“It’s lower (rates) for longer. Let inflation become a problem before it is a problem, and then figure it out down the road,” he said.
“Anyone who tells you differently, I think it might just be a bit of a distraction.”
“That’s the game. And they won’t change until they need to change down the road, because they’re OK with the reopening trade.”
Disclosure: The author held shares in Brookside (ASX:BRK) at the time of writing this article.