Managers prepare for market shift
While the big tech stocks have driven global as well as US share market growth for several years, questions are emerging about how long this will last; and where do investors go when the world is also awash with “low-to-no” interest rates?
In a series of four webinars for fund managers with which it partners, distributor Channel Capital has dissected the very current market trends, including the probability (as it was then seen) of a new US President and good news on the COVID-19 vaccine front, too.
John Malloy, the co-head of emerging and frontier markets for RWC Partners in the US and Ned Bell, the CIO of Australia’s Bell Asset Management, spoke about some of the headwinds faced by both emerging markets and small-to-mid-cap portfolios compared with the US-dominated big-cap growth in recent years. Both also believed there were many opportunities in their respective topics.
Malloy said over-valuation of some currencies, such as the US dollar, after the GFC (and other issues) had held back emerging markets compared with the global backdrop. Over the 10 years between 2001-2011, including the worst of the GFC, emerging markets were up more than 50 per cent annually, compared with an MSCI World figure of 3 per cent.
With an estimated US$17 trillion ($24.3 trillion) of bonds with negative rates and an additional US$6 trillion-US$7 trillion ($8.6 trillion-$10 trillion) of additional quantitative easing, the low-rate environment would be with us for some time. But emerging market currencies were becoming very competitive, he said, creating more opportunity. “Risk is creeping down into emerging market income [bonds] and will eventually (move) into equities,” he said.
Secular opportunities were occurring in the tech disrupters in emerging markets, particularly China, in e-commerce in Latin America and some commodity producers, with copper demand tipped to rise significantly due to the clean energy trend.
Bell said that a headwind for small and mid caps was the massive growth in passive investing, which favours large caps, “and COVID has put a rocket under that.” Many smaller companies had been “crushed” by COVID, such as retailers. But he was heartened by history. The three biggest troughs for the market segment were immediately after the dot-com bubble burst, the GFC, and now the current trough through COVID.
“In the subsequent five-year periods after the first two, small-to-mid-caps outperformed by 70 per cent,” Bell said. “We expect earnings to bounce to US$80 a share, from US$52 next year. It’s an enormous hockey stick. The vaccine, hopefully, underpins an economic recovery.”
Two areas which have missed much of the impact of those headwinds are in the alternatives space: market-neutral long/short equity strategies and private markets. In fact, for most big institutional investors, private equity has been the best-returning asset class in their portfolios for several years, net of usually high fees.
Sean Fenton, the founder of long/short specialist Sage Capital, said that while equity market valuations were at historical highs, they did not look so ridiculous compared with bonds. “The risk going forward is that the historical risk parity has given way and everything is correlated,” he said. “That’s where alternatives step up. Investors are now looking to allocate more to alternatives across different areas.”
There were big dichotomies in the market, especially between value and growth, with some growth stocks having “near-negative relative yields.”
Chris Yoo, a partner at private equity manager Genesis Capital, said that with his sector, recent performance has tended to come down to where, on a size basis, the manager was playing.
He said: “There has been a shift to large buyouts, competing with public markets. But the mid-market player is different. It’s difficult for a large private equity firm to sit out the market for long. Also, the risk profile changes as super-low interest rates creep in. In the mid-market we look to build up a company’s size to the point that the public markets will be interested. At some level, you are more in the real economy.”