Caroline Cai from Pzena Investment Management speaks to The Inside Network’s James Dunn for our IN60 series. The Inside Adviser
The historic outperformance of big tech stocks in the US may look like a global outlier, but many developed markets (including ours) have high levels of concentration risk. That may not be the case for long, with a likely softening interest rate environment set to re-order indexes around the world.
Climate change, COVID travel and the law of large numbers
Covid and COP26 may not seem like a natural pairing beyond their headlines and emotive reactions they induce. Yet there are long-term investment consequences attached to both.
After the initial ‘hurray’ on the global opening of borders and possible travel, the less exciting news is on the cost of Covid tests, the potential expense of being quarantined in a distant country and the medical insurance. If the high cost of tests and paperwork remain a reality, continent-hopping will make travel exotic. Imagine a stopover in Singapore, time in Europe and then a visit to the UK. Three different regimes and test, test, test.
Travel as we knew it may not be the same again, therefore, neither may the valuation of travel stocks unless they think laterally about their business model. Can they bargain-down and simplify the tests?
From a climate perspective, will more people limit flying in consideration of emissions, elect to pay for offsets (another cost) or make a conscious decision on which aircraft they are willing to book in a token effort towards greater efficiency?
Insurance is one sector that faces the (im)perfect storm. Covid-induced QE smashed bond yield returns and the sector is often ignored as a duration-sensitive sector. Events such as bushfire and flooding have become frequent enough to reconsider exposure and pricing to these events. Add-on business continuity or public liability insurance if the impact is misjudged. Any insurer that can use AI to better model its assessment of risk could be the differentiator in this sector.
Working conditions and place are still up for grabs. A decent bet is that the fluid global workforce that used to labour for minimum wages and no conditions is only going to be a fragment of its former self. The WFH of the past two years may see a swing back to the office, but the overall theme is that many will select a mix of the two. Surely the office structure of yesterday will be different into the coming decade? Local neighbourhood working hubs may be a solution to avoid views of the untidy bedroom and noisy animals. This could be the foundation of a new REIT sub-sector.
Then there is the desire to work for a responsible organisation. How many petroleum engineers are graduating today and embracing old oil? The millennials can have strong views on company ethos. In the apparent phase of skill shortage, perhaps too little attention is paid in assessing how appealing it is to work for any listed company.
Mandatory rules, masks, vaccinations, border restrictions became synonymous with Covid. Yet there is resistance to impose such direction on emissions. Recycled plastics, industrial by-product in cement, seaweed extract in animal foods, all may appear fringe, but with a nudge in a regulatory direction could easily become normalised and cost-effective.
Are these really investable ideas? Absolutely. A decent number sit within venture capital and private markets while a growing cohort of listed companies are well on their way to restructuring their businesses towards being early into these technologies.
The era of dominance by some of the big-cap part of the MSCI AWCI is under pressure from slowing growth as the law of large numbers, a push-back on their oligopoly powers and valuations bite. The odds are increasing that the coming decade will see a new set rise that are attuned to solutions beyond jabber on social media.
