Markets have rebounded strongly from their March lows, despite entering one of the deepest economic downturns in history. But that’s not the whole story. We have highlighted divergence in markets, but it keeps widening; polarisation has created “two stock markets” – growth stocks rising faster than underlying businesses while most stocks reflect the current recession. Drivers include ultra-low interest rates, lack of economic growth and money supply growth to offset the COVID-19 impact. We know when crowding occurs, we must look elsewhere. This split masks opportunities in robust areas like, semiconductors, travel and Chinese consumption.
Alarm bells are ringing as retail investors climb on board, stock issuance is increasing and creative financing abounds with SPACs (Special Purpose Acquisition Company) the latest trend - ‘cash boxes’ by another name. This reminds us of late-stage bull markets, for example, 1987, Japan 1989, Technology 2000, Resources 2008. Recent market action around COVID-19 (sell-off and rebound) saw no change in market leadership. We await an acceleration of economic sensitives or a further narrowing, or even collapse, of the current leaders as indicative of the next phase. We can’t define the timing - we suspect it’s more than weeks, but less than years.
We believe this will almost certainly end badly with permanent impairment of capital for many; that is how markets work.
Platinum’s philosophy is price driven, that is, we look for mispricing. This includes buying growing companies like Tencent, Google (now Alphabet), Facebook and Moderna when they were misunderstood. We deliberately avoid expensive stocks, acknowledging that they may go up. This may be uncomfortable (and Fear of Missing Out - ‘FOMO’ inducing) but it is simply not what we do. We build the portfolio by migrating from hotter areas of the market to where we think the risk-reward profile is more favourable. Over the last two plus years this has been in the economically sensitive areas such as China, semiconductors and travel.
COVID-19 roiled markets, but we have to stick to our investment approach. To give a sense of the portfolio’s earnings power, the P/E is 17x 2019 earnings or an earnings yield approaching 6%, contrasted with cash yielding 0% and the MSCI AC World Index 2019 P/E of 22x or an earnings yield of 4-5% (Source: FactSet Research Systems). We expect portfolio earnings to show decent growth above these levels once economies normalise.
Watch the short video update below where I discuss our views further.
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Cheng Yu
Interesting video, but what if Tesla isn't being valued as a car company...but rather a technology company. What if it is more like Nvidia than Toyota?
Michael Ainsley
An informative, timely, succint and dare I say sobering view of the market. A follow up commentary on some specific stocks and sectors to rotate cash into would be very worthwhile
David James
Agreed there are some lofty valuations out there. Whilst Telsa is a curious example, it has some inbuilt options which could prove very valuable: + car manufacturer: leading the market in EV growth. Agreed this alone would require huge vehicle #s to justify valuation. + battery manufacturer: with many end markets - their vehicle range (highest millage in mkt?), other OEM EVs are a probable buyers and home & commercial energy storage (green energy revolution). They are also pumping out patents on battery technology (well beyond my pay grade). There is a reason they have built the gigafactory in Nevada and now building other factories (China, Germany, then Australia please!) + capturing the robotaxi market: we all own vehicles that we utilise 5% of the time. It's clear this model is about to get shattered and Telsa vehicles already have the base capability to morph into Robitaxis (no driver required, sorry Uber you're done). Imagine the stranded assets this could create! +Autobidder: Telsa wants to connect their cars, solar panels, home batteries and commercial batteries as a distributed grid. I think this already operates in Australia? + one of the best marketers in the world as its head. Worth reading the biography by Vance Ashley + other bets: Boring company, trucks, buses... I have no idea how successful Telsa will be, but the opportunity they are focusing on is huge. Elon aims to improve our livelihoods, bank accounts and the environment. All under the banner of long-term planning. Australia could take some notes from his playbook
Nick bird
Well said. You would think by know central bankers would have learnt that asset price inflation is just as dangerous, if not more so, than consumer price inflation. Extremely low discount rates boost the valuation of long duration growth stocks but it is still impossible to justify the share price of many growth stocks, including Tesla and Afterpay. These stocks will fail to live up to expectations and the spread between expensive growth stocks (market 1) and boring value stocks (market 2) will fall from an all-time high to a more realistic level. And when this happens may retail investors will get burnt. It's happened before and it will happen again. This time isn't different ... it's the same as every other time there has been a market bubble.