Expert view: Policymakers have more ammo, can ‘continue to stand behind these markets’
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No matter how you assess the stock market’s performance in the June quarter, most analysts agree it was assisted by an unprecedented policy response from governments and central banks.
And with the health risks from COVID-19 still escalating globally, the outlook for further stimulus measures has become a hot topic heading into the second half of the year.
On that front, a number of Australian fund managers weighed in yesterday as part of Bloomberg’s ‘Inside Track’ webinar series, in a discussion titled ‘equity investing amid the coronavirus’.
Ned Bell, chief investment officer at Bell Asset Management, said while stimulus had supported valuations at a broader market level, it’s created something of a disconnect between stock prices and earnings fundamentals.
“I think markets are currently pricing for a big earnings recovery and as days go by it just seems less likely,” Bell said.
“There’s lot of challenged companies that have high debt levels and have taken a big earnings hit. So the recovery we’re hoping for in second half of 2020 is more likely going to be second half of next year.”
“Frankly in terms of investment strategy, markets pricing very little risk which seems like a disconnect to us. Our perspective is to take more of a defensive stance at the moment, until companies come out in the second half and announce what they doing and how they’re coping.”
For Nikki Thomas, portfolio manager at Alphinity Investment Management, quality companies still offer the potential for strong returns in an environment that’s likely to be supported by ongoing stimulus from global policy makers.
“In my view, the fiscal and monetary policy measures haven’t finished. There’s still enormous power left that can continue to stand behind these markets,” Thomas said.
As a comparator, she cited the recent increase in the size of the US Federal Reserve’s balance sheet, which rose from roughly $US4 trillion ($5.8 trillion) to around $US7 trillion.
But as a percentage of GDP, that figure would have to rise to more like $US20 trillion before it reached the equivalent size of the Bank of Japan.
In addition, she said the generally accepted view among central bankers was that interest rates were going to stay lower for longer.
“Governments are prepared to throw more at this and interest rates are low. It looks like rates are going to be like this for at least another five or 10 years, and I think that’s pretty much been accepted by central bankers around the world.”
“If you think about fundamental valuations where the anchor are rates at these levels, it supports higher valuations. And if you believe the backstop is there — and I think most people do feel that right now — then valuations on good quality businesses are very justifiable.”
In terms of allocating capital, Bell said global global small to mid-cap stocks “are where we see the best valuation opportunities”.
“History has shown that you want to be buying quality names when they’re a bit out of favour and have faced some earnings pressure,” he said.
“From a valuation perspective, they tend to trade at a discount to large cap growth stocks. But the potential for earnings to reflect up on the other side of a crisis is quite phenomenal.”
Bell cited research carried out by the firm which showed that the five-year period following the dot-com boom and the 2008 financial crisis, smaller companies outperformed large caps by “90 per cent and 60 per cent” respectively.
“I think for investors with a three-to-five year view, allocation to small and mid-caps makes a lot of sense,” he said.
“Active managers are going to get a lot more opportunities to add value in the next couple of years.”
Thomas said that in a low interest rate world, the aim was to find companies that were positioned to benefit from trends that had been accelerated by the pandemic, such as remote working and online sales.
Alphinity runs a high-conviction portfolio of around 30 stocks globally.
“Obviously you’ve got Amazon but that’s easy,” Thomas said.
“But then you look at companies with that omni-channel capability. Combining a bricks and mortar channel can create a really convenient offering for the consumer. For example, you may not want to wait for delivery, you may want to buy online then drop past and pick it up.
“Some of these market shifts are going to be extraordinary, and there’ll be some big winners out of that at the same time as bankruptcies.
“So our view is, let’s understand these industries then find businesses with a competitive advantage that provide a low risk competitive return.”