How and where to find value in a frothy market

Patrick Poke

Livewire Markets

In our highly-volatile global market currently driven by government stimulus and whipsawing investor sentiment – both rational and irrational – spotting investment opportunities is tough. But to help you navigate the uncertainty, we’ve asked some of the best in the business where in the world to look, and which themes and sectors hold the most appeal.

The overarching view among our respondents is that we’re in the dying stages of a bull market rather than the beginning. This is the predominant view from financial market commentators, with the exception of a select few including GMO founder Jeremy Grantham, as alluded to in part one of this series.

But we’ve asked them some hypotheticals: if the COVID recovery is just gathering steam and set to send stock markets around the world higher still, what would you buy? And what would you avoid?

And, assuming we're at the beginning of a bull market, what are the ideal places to be investing? 

Finding niche plays: small caps good, cash bad

Emanuel Datt, Datt Capital

Assuming that we're at the beginning of a bull market and accommodative monetary policies continue, our focus is on ensuring the businesses we invest in have a natural hedge against inflation. In line with this, we would consider the retail and FMCG (fast moving consumer goods) sectors to be positively skewed towards greater economic activity. We would also consider smaller cap, up-and-coming companies within the financial services, technology and healthcare sectors.

We would avoid the largest-cap technology companies at this point in the cycle, and focus largely on niche, smaller growth opportunities. In addition, we would reduce exposure to fixed income assets, given the very low returns on offer, and would also reduce our cash holdings to lower amounts than usual. Generating the best returns in such an environment would require taking more risk than usual.

2 winning themes, 2 top managers

Anthony Murphy, Lucerne Investment Partners

While we believe we’re in the twelfth year of a bull market that started in 2009, if we were in the first year of a new market today, some suitable strategies could include the following.

Some of the top-tier fund managers we would consider suitable to capitalise on an early-stage bull market include QVG Capital and Regal Funds Management.

Regal performs very well as a momentum and growth play in strong equity markets. The team consists of highly experienced stock-pickers, and the fund manager is expert at using leverage in portfolios to drive additional returns.

We also highly rate QVG’s opportunity fund and long/short fund. Led by Chris Prunty and Tony Waters, the team consistently tops fund manager league tables.

We believe several market themes currently present particularly strong risk-reward propositions. Resources is one example, given that a proportion of fiscal spending will go into global infrastructure spending.

Inputs for both construction and clean energy – iron ore and copper for the former, lithium and uranium for the latter – are showing good momentum. We have been big supporters of some newly formed resources funds, which have performed very well for investors.

The ideal fund is one that supports outperforming themes long before the strategy hits funds under management capacity.

We expect technology and innovation will continue to perform well, and like Munro Partners for its strengths on these themes.

We also think investors should consider exposure to blockchain and crypto, and in this regard hold an allocation to a rapidly emerging fund in this space.

A strong case can also be made for passive investing strategies in an early-cycle market environment – if you believe that’s where the market is currently positioned. As an investor that champions high-quality emerging active managers, this may sound counter-intuitive. But the low-cost investing options offered by ETFs provide a valuable solution for quickly and cheaply expressing a different view in the market when conditions are favourable.

Almost anywhere but Stateside for stocks

Simon Doyle, Schroders Australia

I have trouble answering this, as I don’t believe we’re at the beginning of a bull market. It may have further to run on say recovery exuberance, but valuations don’t suggest it’s just beginning.

On the basis that it may have further to run, by definition, equities generally offer the upside that other assets don’t – particularly credit. But higher-yielding credit would see further spread compression (a reduced differential between the yields of different types of credit) and price gains.

In stocks, we’d prefer Australia, UK, Europe and emerging markets over the US. 

In terms of sectors, we highlight technology, as recovery would likely bring the laggards back to the fore.

Small-caps that are more aligned to the economy would also benefit. With this likely placing upward pressure on the longer end of yield curves, we’d anticipate Value stocks that have been massive laggards enjoying a relative resurgence.

The appeal of APAC stocks, high-yield credit

Andrew McAuley, Credit Suisse

We don’t believe the market is in the early stages of a bull market, but remain optimistic that equity markets will continue to perform in 2021. Given our view of where we are in the cycle, some of our top investment ideas include:

High-yielding bonds over government bonds: Diversified exposures to Asian emerging market debt, high yield and investment-grade corporate credit looks attractive. Keep cash to a minimum. With interest rates set to remain low for longer, cash is not attractive at this stage.

Equities with exposure to our super-trend themes: thematic ideas that reflect broad societal trends such as an ageing population, technology, infrastructure, decarbonisation of the economy, and intergenerational change.

Chinese and Asian equities looking attractive. China is among the few countries which posted economic growth in 2020 and this year we are forecasting it will grow by more than 7%, far outstripping the performance of developed markets. Countries of the Asia Pacific region have controlled the pandemic better than most other parts of the world, and most have healthy underlying national balance sheets.

Asia-Pacific growth will also be positive for both precious and base metals, the latter already above its pre-COVID levels. US-dollar weakness and low-interest rates will also continue to support demand for precious metals, such as Gold.

Stocks with a link to the COVID-19 recovery are also in favour. The US election result and accelerating vaccine production has shifted sentiment toward stocks leveraged to a pick-up in the global economic recovery. In Australia, this translates into stocks such as the large miners – particularly those with an exposure to copper and alumina – and the commercial banks.

Issues around environmental, social and governance (ESG) and sustainability themes are going to be longer-term trends that attract large volumes of capital from institutional investors. We only see this trend accelerating this year.

The MSCI World ESG Leaders Index outperformed its traditional counterpart by 90 basis points in 2020. The outperformance of the ESG theme is particularly pronounced in emerging markets.

Stay up to date with this series

Whether you buy into the bull or the bear argument (or somewhere in between), make sure you "FOLLOW" my profile to be notified of the upcoming entries to this series. In part one the contributors discussed whether they believe we're in a late- or early-stage bull market, and part three will discuss how to allocate assets at the beginning and end of the cycle.

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This series was co-authored with Glenn Freeman.

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Livewire Markets

Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.

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