Investors urged to look at valuations post-COVID-19

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June 15 2020
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Investors are being warned to look beyond sectors when it comes to a post-COVID-19 world, with individual company’s regulatory environment, valuations and demand outlooks changing businesses’ future growth.

Fidelity international’s chief investment officer, Asia Pacific, Paras Anand, told the media that while sectors will benefit from COVID-19, it is important to make distinctions between where opportunities and risk lie.

“Let’s talk about the technology sector for example,” Mr Anand said.

“We do think the technology remains extremely in a world where we’ve made a quantum leap in digitalisation, and certain use cases are clearly going to have an acceleration in terms of demand over the medium term,” Mr Anand said.

However, investors are being advised to be cautious on valuations, as well as being told to focus on the different regulatory environment and demand outlook, using China and the United States as examples.

“If we are in an environment where there is a higher level of government participation in the economy. One of the things we could expect to see in different parts of the world is higher levels of regulation and intervention,” Mr Anand explained.

“If we start with the US, what we are dealing with are large tech platforms. They are the incumbent monopoly, and they are the ones that get higher government scrutiny.”

With companies such as Facebook and Uber who have previously argued with regulators, they could face a harder time moving forward.

“In an environment where there is a deeper sense of government participation, the regulatory backlash could be substantial. That would evolve and impact their business model.

“That is very different if we look at Tencent in China or the large technology platforms who generally have party members on the board. They have been developed with that view of their societal contribution and societal responsibility.”

This means the companies are less likely to be regulated.

“We do see great opportunities in technology and healthcare, but it is not enough in the environment we are going into to make broad-based recommendations.”

“I think one needs to look at the particular market, the particular company and the valuation to really define where sources of future returns are going to be attractive.”

COVID-19 has also revealed some surprising winners from a value perspective.

“There are areas around connectivity and telecommunications as we move to a 5G environment,” Mr Anand said.

“We are finding interesting opportunities in the financials and the banks, discounting a very low rate environment, pressures on net interest margins. But again, as we extend our view and our time horizon, we see real value in the markets.

Meanwhile, Fidelity’s portfolio manager, George Efstathopoulos, noted that sectors which theoretically should struggle are becoming attractive due to the discounted rate investors have put on the shares.

“When we think about a post-COVID world, these are the things fundamentally that should do well, and these are the things that will struggle.

“Then you also have to incorporate the pricing element. So, there are things that should be doing well but that have been priced in.”

“I’ll touch on financials. In theory, when rates are lower for longer, implications on NIMs (net interest margins), plus implications on NPL formation (non-performing loan), but on the other hand the pricing on a PB (price to book) is very cheap today.”

“We are paying more attention especially in Europe. Should we get more positive news on the European recovery front, that will have positive implications especially for banks,” Mr Efstathopoulos said.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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