Home / Markets / Why quality matters more than ever: Bell AM

Why quality matters more than ever: Bell AM

Defining quality and why it is more important than ever as stocks fall

Markets are falling, interest rates are rising alongside inflation, the US dollar is appreciating along with bond yields and money is moving away from risk. While the crisis in Ukraine still plays out, it certainly has exacerbated risks surrounding growth and inflation.

Ned Bell, Chief Investment Officer at Bell Asset Management discusses the current market outlook and performance of global equities. He says a huge rotation from growth to value has occurred, especially in some of the big US tech stocks. “When we think about the likes of “Netflix, Meta, Alibaba, Tencent, Nvidia, those names are down on average 39 percent year to date.”

The magnitude of these drawdowns is huge. Bell says, “there’s really two factors that are instigating these drawdowns. The first one being that the magnitude of earnings growth is flattening quite substantially.” Looking at the PE ratio chart of the Australian market, it was sitting on a whopping 80x. This has dropped dramatically back to its average, currently on 25x.

  • Bell says “this is what you would expect when interest rates start moving higher. What we’re seeing is a change in where the momentum is, in terms of the various style buckets within markets. Interestingly quality stocks as a whole have lagged, by a bit over 3 percent in the first quarter of this year. That is somewhat of an anomaly.”

    Quality stocks have only done a little better than growth but worse than value.

    So, what is a quality company? Bell defines a quality company as one that is consistently very profitable and has pricing power with little to no debt.

    Over the last few years, consistent profits haven’t been rewarded. The market has rewarded companies for their forward growth metrics. Bell says, “So companies with pricing power, and a lack of interest rate leverage, are perfectly positioned for this environment.” To highlight the factors in this environment, “you’ve got inflation at a 40 year high. It ticked over 8 percent recently. It’s coming from energy, food, employment, housing and from transportation.”

    And so the environment is favourable for quality stocks. In the past, it has been growth at any price or reasonable price, is what has worked.

    Growth is slowing pretty meaningfully together with the composition with growth.

    Taking a three-to-five-year view, Bell concludes by saying, “this is a great time for active management… Buying momentum, and the market as a whole has definitely got some flaws. Being nimble and agile is really important.” By taking a bottom-up perspective, there are opportunities to find quality stocks at discount valuations.

    Print Article

    From Covid to conflict, the issues set to drive markets

    From Covid to conflict, all it took was just a few weeks for the market to shift its attention to the unfolding crisis in Ukraine and away from the pandemic. The crisis disrupted supply chains and triggered record-high inflation which forced central bankers to raise rates to contain the rise. What came next, was a…

    Ishan Dan | 19th May 2022 | More
    Super wars renewed by Morrison ahead of election

    Once a stalking horse for a small cabal of noisy backbenchers, “Home First, Super Second” has found its way into the Coalition’s policy arsenal ahead of an unpredictable election. It was perhaps premature to write, in late March, that the super wars were over. Scott Morrison’s announcement on Sunday that first home buyers would be able…

    Lachlan Maddock | 19th May 2022 | More
    Good time to buy quality semiconductor companies, say experts

    For investors looking to build positions in quality technology firms, the US computer chip giants are trading at attractive price levels, with many brokers now rating them as a buy, according to data from the Wall Street Journal. The prices of semiconductor companies have dropped sharply this year amidst a broader sell-off in technology stocks…

    Nicki Bourlioufas | 19th May 2022 | More
    What does High Conviction mean?
    Ishan Dan | 18th Mar 2021 | More
    Evergreen ratings highlights new venture capital prospect
    Ishan Dan | 18th Nov 2021 | More
    FASEA exam extended nine months*, waiting period waived
    The Inside Adviser | 12th Jul 2021 | More
    Top hedge fund award goes to L1 Capital
    Greg Bright | 13th Dec 2021 | More
    Better Advice Bill changes enter consultation
    Staff Writer | 30th Sep 2021 | More
    IN60 with Andre Roberts from Invesco
    The Inside Adviser | 18th Oct 2021 | More