Making money in your second bull market
2020 may variously be described as surreal, unprecedented and good test of investment fundamentals. For star Australian fund managers Geoff Wilson AO, Founder and Director of Future Generation; Ben Griffiths, Managing Director and Senior Portfolio Manager at Eley Griffiths Group; and Jacob Mitchell, Founder, CIO and Lead Portfolio Manager at Antipodes, the recent Future Generation Virtual Investment Forum was a good chance to take stock and look ahead.
“We’ve had the bush fires … and then with Covid we’ve effectively had a bush fire in the equity market,” said Wilson. “The longest bull market came to a swift end in March but was followed by nearly the shortest bear market in history. That is just bizarre.”
But do new lessons need to be learned in unprecedented times or do the tried and trusted maxims of investing hold true? Watch the following video to find out what the experts think.
“Every crisis, every panic, every market sell-off is different but the play book tends to be the same,” said Griffiths. His three key takeaways are: beware of extrapolation bias or recency; in times of meltdown, get after quality stocks; and always keep an eye on the price charts.
A health crisis meeting a credit crisis over 2020 has been a test for any investor's play book, especially given the forgiving monetary policies in the US prior to the Covid-19 pandemic.
“There was a lot of pretty poor investing and capital allocation taking place prior to Covid,” said Mitchell. “You could see the credit crisis coming, Covid just made it happen faster. The question now is how quickly does the policy response take traction.”
With a lot of fund managers seemingly pursuing a sideline in amateur epidemiology these days, the experts also tackled the recovery from Covid-19, the impacts of a vaccine on various regions and how to position portfolios for a reopening.
“The cold, hard reality of this is that governments increasingly won’t have the option of going into lockdown,” said Griffiths. “They won’t be able to afford it. Central banks have deployed almost every tool at their disposal. Governments are pretty much at the end of how much fiscal stimulus they can throw at it. We are going to have to evolve some strategies that don’t involve a total lockdown.”
But despite central banks telling governments that they are ‘out of bullets’, major events like the US election may yet boost consumer confidence even without a vaccine on the table.
“Politics is a blood sport in the US. The only scenario we see for a lot of fiscal stimulus is a clean sweep to the Democrats who put in place some sort of social wage program like the Green New Deal,” said Mitchell.
The path forward for ‘overcooked’ US tech stocks will also be a dominant narrative over the remainder of 2020, especially for new investors who have yet to discover the market is not a one-way bet.
“There has to be a wash-out at some point in time,” said Wilson. “I was always taught that you make your money in your second bull market. That means you learn your lessons in your first bull market, and one of those is that markets don’t go up for ever.”
This investor desire for structural growth has gone beyond the tech sector and fuelled a broader trend, noted by the panel, towards growth at almost any price.
“Investors have simply said "give me growth and I’ll pay whatever price I can for it’" And that’s across sectors — it’s not just a tech phenomenon,” said Mitchell. “The premium you are paying for the top quintile of growers versus the bottom quintile of growers has never been more stretched.”
Asked to predict the next big event and the stocks that might benefit, the panel offered a range of views:
“We try to buy undervalued growth companies and our view is it is time to embrace Australia’s reopening,” said Wilson. “Flight Centre have done an exceptional job getting costs out. There are some smaller ones that we like such as SeaLink … and Tourism Holdings.
“In terms of the next big event, I worry about all the liquidity being pumped into the system and interest rates backing up. The US election in the short term will be significant.”
For Griffiths, the US election is just one factor with market sentiment also to be dictated by the stimulus bill that has yet to pass the House.
“Following on from that — and ahead of the election — we will have third quarter reporting season in the US as companies begin reporting from the third week of October. Nobody is really talking about it, but this will give us live data, live information on how corporate America is faring,” he said.
“I’ll also give you two stocks. We also want to place a bet on reopening and one stock we have bought progressively through both the challenged market, and periodically through the rallying market, is Auckland International Airport. The other one … is The Reject Shop.”
Mitchell said his greatest concern was a close US election with the biggest tail risk being the US dollar.
“You lose your reserve currency status slowly, and then you lose it quickly,” he said. “When does that accelerate? Is there an alternative? In terms of stock ideas, we are broadly overweight Chinese consumer stocks. Some of them are very well know and found in most portfolios like Alibaba and Tencent. But I think you can make a case that, at current valuations, they make a lot of sense.
Future Generation: Providing Social and Investment Returns
Future Generation Australia (FGX) provides investors with diversified exposure to Australian equities while supporting children at risk.
Future Generation Global (FGG) provides investors with diversified international equities exposure while changing the lives of our youth affected by mental illness.
Visit the Future Generation website to learn more about Future Generation Australia, Future Generation Global Investment Company and the charities that they support.
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The Future Generation Companies, Future Generation Australia (ASX: FGX) and Future Generation Global (ASX: FGG), are Australia’s first listed investment companies to provide investment and social returns. Future Generation provides shareholders...