March 2021
Voices Within The Herd: A herd in the same direction?
Reflation? Deflation? Inflation? For inexperienced investors, it’s enough to make your head hurt. One year on from the pandemic which changed our world- the issue of inflation has become the current hot topic. So we focus our Voices Within The Herd as an attempt to pick out either difference of opinion within our herd- or notable areas of agreement.
WHO IS THE HERD? AND WHAT DO WE WANT FROM THEM?
One of the tasks of a financial adviser should be to dissipate informed opinion on markets and therefore provide insight on investment performance. Ideally, the best opinion is in the same pasture so that we don’t have trouble finding it. Cows have a strong protection behavior- so when our herd is focused on the same subject- a growing sense of confidence is gained when they agree. Alternatively, when they disagree- we know we have a subject of some contention. Valuable, especially when you look at the quality of the stock in our herd: Momentum, VAM (via Sanlam), Quilter Cheviot (QC), and Russell. All of our stock have access to deep research departments. Having been in such a department (as a visitor) and as a voice for inexperienced investors, the feel is like a trip into an office of aliens. Not unusual to find the team skilled in different languages debating mathematical formulas and addressing empirical and subjective wisdom at every turn. In short, what the lay and inexperienced investor seeks from these abnormal intellectual sensation seekers is the conclusion. This is what our Voices Within The Herd seek to provide. Not the deep debate- but the ultimate areas of agreement or disagreement.
MARCH- A HERD MOVING IN THE SAME DIRECTION?
For those with the Bitcoin FOMO- (Fear of Missing Out) the first piece of advice is that Q1 chatter on the success or otherwise of digital assets didn’t come from our herd. That’s another pasture making a noise. Not yet a big enough asset class to distract our herd.
In the month of March, we focussed on Momentum, VAM, and Quilter Cheviot (QC) to find two areas of agreement that might be pertinent to Mondial investors. The narrative of similarity is based on the conversation moving from the scale of the economic recovery to the implications for inflation. MARCH 2021- FOCUS POINT 1- REFLATION VERSUS INFLATION. Here the herd is somewhere near the same voice. For Momentum- inflation risks are clear but veer to the downside suggesting that inflation is “not likely to be large or persistent enough “to warrant a change in terms of the Federal Reserves attitude to Interest Rates. They suggest that inflation expectations are up to the pre-pandemic levels of around 2.1% p.a. over 10 years- “in line with Fed targets”. Or as QI points out, Central Banks are prepared to “look through” the temporary rise in inflation. The VAM (Sanlam) explanation of the inflation threat is excellent taking out some downside inflation fears by explaining the difference between REFLATION and INFLATION. REFLATION: When Central Bankers around the world aim to reflate their economies by allowing some inflation. The theory is that the costs of goods and services go up which means that corporate income rises. This revenue in theory would help deal with expenses that will not have necessarily gone down during the pandemic. INFLATION: When costs of underlying commodities increase then at some stage there is a risk that costs will gravitate from commodities into consumer prices. Sanlam believes that Jerome Powell (Fed) views rising bond yields as signs of optimism of recovery and may even be happy to see inflation rising to 3% p.a. for over a year in order to catch up with a year or so of missing inflation. This is possibly what Momentum refers to as the “reflation trade”- the consideration that rising profits for companies may reflect rising prices which will trigger rising prices for consumers but that can’t be too bad a burden if those costs aren’t too high and out of control, and if such rising profits enable corporate (job) sustainability. MARCH- FOCUS POINT 2- EQUITY GROWTH- SUSTAINABLE BUT ROTATING FROM GROWTH STOCK TO VALUE (CYCLICAL?) Again the herd is somewhere near the same voice. It doesn’t seem that the herd is particularly perturbed by a raging bull which tagged onto the aftermath of the worst recession since the Great Depression. In the year since the pandemics start, global equities returned 30% despite a 35% decline during the uncertainty of the first few weeks. From the herd we take the opinion that equities remain in a good place, the QC assessment is for “equities to surprise on the upside” on the back of global GDP rising to 5.2% after a 2020 contraction of minus 3.5%. The big threat to equity performance sustainability remains COVID. The virus’ habit of spikes and waves remains a current issue but our herd forecasters are trained to look more to future prices. So upside sentiment remains fixed on the assumption of vaccine roll-out success.
Where we have a sort of confusing agreement amongst the herd is an expected rotation in terms of the types of stock from Growth to Value stocks (Momentum and VAM) or QCs view is more Growth to Cyclical stock. The main trigger for this being the rise in the 10-year bond yield (which almost doubled), which is the world's key discount rate. This has particularly undermined equities hence the Feb fall of 4% on the MSCI World equity index. Growth stocks were particularly hampered. So our help here is to explain the three types of stock mentioned:
GROWTH STOCK: these are companies that are considered to have the potential to out-perform the market generally over time. As a result, the PR (Price Earnings ratio) measure on price is frequently ignored because of the expectation of the future value rather than relying on dividends to repay the purchase price in line with market PE metrics. However, they tend to be volatile and sensitive to bad news.
VALUE STOCK: these are companies trading below their worth in terms of the PE ratio.
CYCLICAL STOCK: these stocks will do well when economic conditions are good. QC clearly believes economic conditions will improve with an economic recovery so that (for example) consumer durables will do well as the consumer's discretionary spending is ignited.
Interesting slide this as VAM/Sanlam compare the results of a Growth (albeit an index) vs specific stock results (stocks which might get categorized as value). It fits the Mondial ethos: slow and steady wins the race. So that’s why we like it!!!
Conclusions:
The talking points of March 2021 might well be with us for some time:
Reflation to inflation- current expectations are that Central Bank is happy to sit back and observe rather than take action.
Equities remain with a positive outlook. As Momentums Viewpoint surmises- we should expect “one of the biggest recoveries in history to come in the second half of 2021 into 2022…..equities offer good opportunities to participate in the recovery, especially in value sectors…”
This all rather suggests that sitting back as a passive investor might work for equities- but maybe not for other asset classes. More importantly, active equity investors should actually do better than passive equity investors as they manage the journey between growth, value, and cyclical.
Let's take this discussion further, schedule a complimentary consultation with one of Mondial's prominent advisors at +971562228535 or email us at info@mondialdubai.Com
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