Pro investors are ‘paying close attention’ to this key 2021 investment theme
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Since Joe Biden won the election in early November, US political risk has been a key factor in the outlook for markets.
The initial prognosis was for a “Goldilocks” style result — a Democrat executive branch with a Republican-controlled Senate blocking the passage of additional spending measures and possible tax hikes.
But after Democrats beat the odds to take both Senate seats in Georgia, things have changed again.
Biden has flagged his first spending boost, with plans to raise the next COVID-19 stimulus cheque from $US600 to $US2,000.
Also, US 10-year bond yields climbed back above one per cent this week for the first time since March last year.
It’s raised a talking point in markets: will the post-Covid status quo — rock bottom interest rates supporting big gains for high-growth tech stocks — remain in place with a Democrat-controlled Senate?
To get the investor view, Stockhead got some insights this week from Oracle Investment Management’s Luke Winchester about the year ahead.
“My take is the market has been quick to price in a reflation trade – commodities flying and longer dated yields ticking higher,” Winchester said.
With Senate Democrats appearing to be on board with higher stimulus cheques, such as reaction was “probably fair”, he added.
While bigger budget deficits and more infrastructure spending could be on the cards, Winchester said direct payments will be a key area to watch. (Inflation, is that you?)
“To me the ‘helicopter money’ approach of direct payments has the potential to be much more inflationary than traditional ‘trickle down’ fiscal spending, as it gets cash into the hands of consumers with the highest marginal propensity to consume quicker,” Winchester said.
“Now the stigma has been breached, will Democrats continue with payments even as the COVID-19 recovery begins?”
Winchester and the team at Oracle take a more “bottoms up” approach to investing, focusing more on the individual attributes of specific companies rather than “top down” cues from macroeconomic changes.
However, he said Oracle is “paying close attention” to the macro environment, and “anyone who has been positioned in market winners over the last few years (growth/momentum) should do the same”.
“From a portfolio positioning point of view you are already seeing the theme play out over the last few days; ‘long’ resources, financials and value and ‘short’ tech and growth,” he said.
Importantly, that trend marks a reversal to the prevailing market dynamic of the last four years.
“To be honest I couldn’t say confidently that this theme will continue all the way through 2021,” Winchester added.
“But I do think the underlying drivers of that theme (higher inflation and yields) are the highest likelihood of playing out that they have been for a long time.”
When Stockhead caught up with Winchester in November, he highlighted that Oracle had stayed out of the highest profile post-COVID tech rallies, such as ecommerce and BNPL.
“From that point of view we would hopefully avoid the worst of the impact to that side of the rotation,” he said.
But if US government policies do help support a rotation away from growth to value, the market is likely to refocus on “near-term earnings strength”.
“So you would expect to see the most pain in the high multiple stocks relying on large future earnings to support the price,” he said.
Right now there are a number of companies in the small to mid-cap space where Oracle invests that are currently trading over 30x forward EBITDA, he added.
In the context of a market re-rating, a 20-30 per cent fall “would only bring them back to expensive from ridiculously expensive”, Winchester said.
It’s reflective of the heat that came into the high-growth tech market in 2020, but whether or not those conditions can last is now a key question on the radar of professional investors.
ASX markets responded positively to the US political result yesterday, but unlike many sessions in the Q4 rally, gains were led by the big end of town — underpinned by traditional value stocks like the big banks.
In the commodities space, gold also rose strongly (not to mention bitcoin), while oil prices are surging higher.
And if a bigger rotation into ‘value’ does come to pass, Winchester said he’s “broadly happy with the positioning” of the Oracle portfolio.
“While a full blown commodities boom would hurt, we accept that volatility in that space is the price we pay,” Winchester said.
However, “mining stocks just generally don’t tick the boxes we look for with investments — primarily steadily growing earnings streams”, he said.