Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Inflation is like chewing gum: sticky and flexible
Leading thematic manager, Capital Group, is confident that the market downturn of 2020 was short-lived and entirely related to the COVID-19 outbreak, according to vice-chairman and president, Rob Lovelace.
Expanding on this point, he says that the “the powerful upswing in equity prices since then is simply a continuation of the bull market we’ve seen over the past decade. Market leadership today is essentially the same as it was before the pandemic.”
Some of the biggest gains were in a small number of US companies; mostly internet-related businesses. Outside the US, the same thematic was prevalent with tech-focused companies benefiting from the same powerful tailwinds surrounding the growth of e-commerce, cloud computing and interactive media.
Lovelace sees the continuation of this pre-pandemic trend. “The ongoing war between inflation and deflation could define markets in the years ahead”.
“Inflation levels will likely remain elevated through late 2022, fuelled by labour shortages and broken supply chains. “Consumer prices will eventually return to normal, but that process may take longer than US Fed officials are expecting,” says Capital Group fixed income portfolio manager Ritchie Tuazon.
Capital Group describes inflation as “like chewing gum”- it’s sticky and flexible, and you definitely don’t want to step in it. “For the past 30 years, investors in developed markets haven’t had to worry much about stepping in it. That changed last summer when COVID-related distortions caused prices for some consumer goods to skyrocket. Today, the biggest questions for investors are how high will it go and how long will it last?”
Looking ahead, the risks are clearly defined: global economic growth is slowing, especially in China. Central bankers have started a gradual reduction in monetary stimulus measures. And valuations are elevated across the board, from stocks to bonds to real estate. “Investors should prepare for a rough patch,” says Capital Group’s Asia economist Stephen Green. “China’s economy is slowing and credit is tightening in the real estate sector. I think second-quarter GDP growth will be considerably lower than the consensus forecast of 5.6%.”
“US economic growth should be solid, in the range of 2.5% to 3.0%, but hampered by emerging COVID variants, waning stimulus and inflationary headwinds,” says Capital Group economist Darrell Spence. The major European economies may grow significantly faster, in the 4.0% to 5.0% range, as the eurozone enjoys a delayed but now strong COVID rebound, adds the group’s European economist Robert Lind.
Capital Group is, however, optimistic about an environment that is ideally suited to selective investing grounded in bottom-up, fundamental research. The group does caution against complacency, but rather selectivity, and takes a cautious overall credit risk stance. “There is still value to be found in certain areas and companies. This is where bottom-up, fundamentally driven research, and a diversified global approach can add value by identifying potentially attractive opportunities. Security and sector selection could be to be significant drivers of excess return going forward,” says Capital Group.
