A mixed bag for equities, at home and away
Equity markets occasionally need to be cleaned out, and the age of the “PowerPoint presentation business” is over. That doesn’t mean the end of quality growth.
JPMorgan CEO Jamie Dimon recently made headlines with a warning that Americans should brace themselves for an economic “hurricane”. Nick Griffin, CIO of growth equities manager Munro Partners, was privy to a similar warning from Dimon a few weeks prior on his visit to the United States, and on Tuesday (July 26) delivered one of his own, perhaps even more sanguine: “untold damage” to the economy and earnings as a result of the high-speed hiking cycle.
But Griffin is more optimistic than such a forecast would imply. For growth companies, most of the damage has already been done. And while he won’t say when exactly is the right time to put cash back to work, there are three things he’s waiting for: the peak of long-term interest rates (which he believes has already arrived); earnings estimates to come down; and more time.
It’s the fifth bear market Griffin has seen; a big one will last eighteen months, a short one just three. This one has been going for seven months. If you respect history, Griffin says, we might only be halfway through. Griffin raised 40 per cent cash in Munro’s absolute return equity product in January, but would have gone as high as 80 per cent if he knew how bad the damage would be for the remaining 60 per cent.
“These financial cleansings are really important to how you set up asset markets; they’re really important for how the Fed regains credibility; and they’re very important for curbing excessive risk-taking,” Griffin said.
“Indiscriminate” is now probably as overused as “unprecedented”, but it remains useful shorthand for a sell-off that has punished even those companies like Microsoft and Apple, which are unlikely to see earnings downgrades of the quantum of the YUC (Young and Under-Capitalised) companies. Stop-losses have contributed most of Munro’s outperformance relative to its peers – it’s only down 20 per cent where some other growth managers have lost double that or more. But the fall in valuation of those aforementioned big cap tech stocks has been the real upset.
“We’re really surprised to see Visa down this year, even though it’s had multiple earnings upgrades. AMD is down this year, even though it’s had multiple earnings upgrades,” Griffin said. “Even our healthcare companies are down nearly 20 per cent this year.”
“This just speaks to the broad de-rating that the market has gone through. We, and others, just massively underestimated how far behind the curve the Fed got on inflation. From our point of view this is over… the market could have already bottomed, particularly for these stocks, because there’s absolutely nothing wrong with them.”
But investors can never go back to the YUC-y companies, Griffin says, because they can never go back to the capital markets and get the same reception they did during the money-fueled tech bubble. The giants of that bubble were basically paying their customers to use the service.
“All that excess capital disappears and all these companies have to either merge or go broke,” Griffin said. “They’ll all merge, and eventually the leaders will appear. Uber has a chance of being one of those… But if you go back in time there were eleven search engines at the end of the last boom: Ask Jeeves, Yahoo, Alta Vista.”
“Out of it came Google as a monopoly and nobody else. We’re going from eleven-to-one again in the next five years – so why not just invest in number one? All these wannabe fintechs are not going to make it. Visa and Mastercard are going to be fine.”
Jun Bei Liu, portfolio manager for the Tribeca Alpha Plus long/short equity fund (photo at top), notes that while the ASX has not fallen as much as its global peers, owing to its potent mix of homegrown miners and energy companies, around 80 per cent of its companies are in correction mode, and 60 per cent are in full-on bear territory. But their earnings remain strong (Liu expects they’ll eventually follow equity prices lower), as do their balance sheets; they’re almost debt-free, Liu says, and she expects that they’ll soon put that excess money to work.
“There will be more mergers and acquisitions, there will be more buybacks, there will be more dividends – there’ll be a lot more of all those activities taking place. And that’s very supportive of a more positive outlook for the valuation of our sharemarket. In fact, this reporting season, we’re going to see some of the biggest payouts and buybacks yet. That bodes very well for our market to stay resilient relative to the global market.”
There are four themes that Liu believes will drive the local market over the next twelve months: consumer sentiment will continue to fall in the face of chunky interest rate rises; housing market stress; the Chinese economy, and its consumption of our commodities; and the ascendancy of “quality growth leaders” like healthcare, which are a “strong standout buy” in this market.
“There are a lot of uncertainties in the world, and Australia has a very cyclical market – there’s banks, resources, and industrials which are very much dependent on macro issues,” Liu said. “Healthcare is not, and it’s going to grow regardless of the macroeconomic outlook – whether you have a recession in the US, whether you have a recession in China. It doesn’t matter.”
“Most of our healthcare companies didn’t benefit from Covid – they’ve mostly been a loser… for these companies, earnings are actually going to have a meaningful catchup to what they were.”