During the global financial crisis central banks prescribed an antibiotic, known as quantitative easing (QE), to an ailing global economy. Today, the global economy is in good health, with the antibiotic now creating dangerous distortions in global asset markets.
One of the biggest distortions is within fixed income, with European junk bonds at 2 per cent, absurdly (at least to us) yielding less than 10-year US treasuries at 2.4 per cent.
As the antibiotic is eventually unwound (either actively or via inflation), credit markets and expensive equity sectors such as staples and internets may be vulnerable as the search for yield and growth subsides.
Low-volatility strategies and so-called bond like equities that have been chased irrespective of earnings growth will also be vulnerable going forward.
The majority of passive inflows into ETFs are heading into parts of the market that, on Antipodes Partners quantitative scores, are close to long-term relative valuation highs.
However, we are still optimistic on parts of the global economy that have not required, or will directly benefit from QE unwinding given the backdrop of strong growth.
For example, companies participating in sustainable emerging market consumption growth, financials that benefit from a steepening yield curve, and the neglected energy and telecoms sectors.
Technology also remains popular, but with challenges.
Reasons to avoid the technology titans
Risks to invest in the major US technology stocks include:
1. Tax and regulation: The big technology companies are coming under increased scrutiny by governments around the world because of their size, influence and role in society, particularly around managing sensitive information.
2. Fierce competition: Another risk is they’re getting so large they’re effectively competing against each other. Whether it’s Amazon and Netflix competing on content streaming or Amazon’s Alexa threatening Google with its voice search capabilities and challenging their core product search ads business, the titans are bumping heads. Likewise Google is attacking Apple by focusing on its own smartphone handsets and Microsoft attacking Amazon’s AWS cloud business with its successful Azure platform. Expect more of this.
3. Market positioning: These high-growth stocks have become excessively crowded trades as investors have paid for growth in a low interest rate environment. If that changes, they’re vulnerable, and improved global growth could not only brighten the prospects of out of favour cyclical stocks, but force long-term global interest rates higher. That sounds like a contradiction – why would growth stocks do poorly if growth is surprising? The whole reason for owning them is because growth has been disappointing so if you want protection from a low growth environment you bought these stocks.
Changes to the US tax structure could also spur growth as capital is repatriated back to the US and in doing so unleash a wave of acquisitions that could put unloved ‘‘value’’ technology stocks in play. Value technology companies include:
- NetApp, a multinational storage and data management company which is traded at 11 times cash flow, which is cheap ‘‘for a business that isn’t heading for extinction’’. NetApp probably sits inside a Cisco and is a tiny little bite for them.
- Twitter, the unloved yet influential media platform which changed the way celebrities and politicians exert power. Twitter ultimately belongs inside a Google or an old media company like of 21st Century Fox which has a enterprise value of $US70 billion compared to Twitter of $US14 billion. Despite highly attractive ad unit prices which could rise substantially, Twitter trades at a price of five times revenue (albeit with ‘‘not a lot of profit’’) compared to Facebook at 14 times. Twitter is unique due to its business model and deep user interest data which is not owned by many successful social platforms outside of Facebook. Yet Twitter has until now been shunned by the market, and potential suitors. Its share price has done next to nothing for two years, and it’s well off from its $US25 listing price (and peak of $US70) at around $US21 per share.
Antipodes looks for global investments that are not just undervalued, but combines this with the identification of investments that offer a high margin of safety and multiple ways of winning; or losing if it considering the investment as a short opportunity.
Jacob Mitchell is chief investment officer at Antipodes Partners – Zenith’s 2017 Fund Manager of the Year.