Speculative market in growth stocks give cause for concern
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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Andrew joined Platinum as a founding member in 1994 in the capacity of director and Deputy Chief Investment Officer. Previously he was a Vice President of Bankers Trust Australia covering Asian equities and managing the BT Select Market Trust -...