Markets have been on a rollercoaster, so we asked two investment pros: Where to next?
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Sharemarkets globally have staged an impressive rebound into the first half of April.
But two professional fund managers we spoke to are adopting a cautious stance towards the short-term valuation outlook.
At the height of the March chaos, the ASX Small Ords Index slumped by almost 42 per cent from its February 21 highs. Since then, it’s risen by almost 30 per cent.
The rollercoaster ride leaves markets at an interesting juncture; valuations have rebounded, but real economic activity remains grounded across the globe.
As Westpac chief economist Bill Evans noted in a recent panel, markets typically look six to 12 months ahead of the economy in the process of ascribing valuations to shares.
And for Gregg Taylor, chief investment officer at Bombora Group, that process may be skewing towards excessive optimism.
“I think everyone’s been surprised about how sharp and quick the rebound has been in the listed equity market,” he told Stockhead.
Taylor compartmentalised the volatility in three stages, with “indiscriminate selling” (stage one) followed by a positive response to unprecedented government stimulus measures (stage two).
Most recently, there’s been “a bit more certainty” around the shape of the curve on new COVID-19 infection rates. But that’s where he thinks investors may have become too over reliant.
“It seems the market is completely and solely focused on the COVID-19 curve, and less focused on the depth and duration of the economic impact,” Taylor says.
From a macro perspective, therein lies the million-dollar question; whether share prices have run too far ahead of the real economy. But good luck trying to pinpoint that moment.
As Taylor notes, “it’s hard to find anyone who can consistently add value through market timing.”
Similar sentiments were shared by James Whelan, investment manager at VFS Group.
“We’re cautious towards the end of April because we think the disconnect between the market and the economy has now gotten really wide,” Whelan told Stockhead on Friday.
“I don’t think the full gravity of the economic fallout has actually hit home yet, and we’re hesitantly confident the market will retest those lows as that starts to become a bit more found out.”
Local markets got off to a more cautious start on Monday, as the ASX200 fell by more than 2 per cent for the first time this month.
For Taylor, the current environment presents an opportunity to work closely with Bombora’s portfolio companies, rather than deploy extra cash amid shifting macroeconomic winds.
“We typically have a board seat for key equity positions we hold, so we’re having daily conversations about how to use the current market conditions to their advantage,” he explained.
Taylor cited the example of healthcare tech company PKS Holdings (ASX:PKS), which is in a trading halt pending the acquisition of a similar-sized business, at an EBITDA multiple which “would’ve been unheard of even three months ago”.
As a lead manager of the VFS Global Macro Fund, Whelan took advantage of some COVID-19 related opportunities in March which included a profitable trade in Netflix (a beneficiary of the enforced lockdown).
But the group’s focus has shifted to companies that will benefit from the emerging macroeconomic environment, which has been materially altered in the wake of government response measures.
“We’re looking for reasons to pivot towards companies that will benefit from low interest rates, and also an economy that will be forced to rebuild and grow. ‘Unloved cyclicals’ is a phrase that keeps going over in my head,” Whelan said.
Taylor added that in terms of stock-picking opportunities, the volatility had provided opportunities to get exposure to some “high-quality names at a better medium-term valuation”.
However, “I think until the focus around infection rates settles down and the market refocuses on fundamentals of each company, it feels a bit early to go too hard” on listed equity investments.
“Very few (investors) are good at making macro calls on timing the market. We’d rather work with a small number of companies that have stable revenues and strong balance sheets, who are in a position to do some interesting things,” Taylor said.