The market’s willingness to pay for growth, profitability and momentum is approaching the heady days of the late 1990s tech bubble and extreme policy settings in developed markets have led to severe investor headwinds, signalling significant risks for global investors, a specialist fund manager has warned.
According to Antipodes deputy portfolio manager Graham Hay, both North American and developed European equities look expensive and given these regions represented over three-quarters of the MSCI ACWI, investing in the global index is unlikely to lead to attractive long-term outperformance.
“Comparatively, both developed Asia – especially Japan, Korea and Taiwan – and the overall emerging market sector stand out as regions with greater return potential,” Hay told the Pinnacle Investor Roadshow in Sydney today.
“The market is celebrating stocks that display high growth, profitability and momentum independently of their starting multiples.
“Troubled by fears of desynchronising global growth, investors continue to prefer the United States, while at the same time rotating out of low multiple stocks, or ‘value’, in favour of ‘structural growth’ and ‘quality’ exposures, irrespective of price.”
He said value has now underperformed structural growth over one, three, five and seven-year time horizons, with the underperformance particularly acute over the past one and seven years.
Looking forward, he said he believes while the US growth environment is unlikely to accelerate much from here, the combination of fiscal stimulus and the easiest US financial conditions since the global financial crisis should sustain growth at current levels for longer.
“However, we believe the unusually favourable Goldilocks combination of accelerating growth and tepid inflation experienced in 2017 will not repeat,” he warned.
“Instead, normalisation of interest rate policy will likely upset the rhythm with more volatile and less forgiving markets.”
Highlighting the hiccups investors should look out for, he noted these could come from cyclical growth disappointing due a US or Chinese policy error.
“In this scenario, credit volatility would spike, triggering a major sell-off in credit-sensitive equities,” he noted.
“Conversely, the inevitable central bank reaction would further amplify imbalances and support a continued melt-up in the quality/growth factor, led by the internet and software giants.”
