Interviewer Sean Aylmer: Ashley, there’s incredible volatility in Wall Street at the moment, particularly among the tech stocks. What is going on?
Ashley Pittard, Pendal’s head of global equities: It really comes down to a couple of key points. The key points are:
All of that together creates uncertainty and that uncertainty is creating volatility in companies that have re-rated over the last five years to valuation levels that are very, very high.
Interviewer: Inflation – is it transitory or is it structural?
Ashley Pittard: I get back to what Fed chair Powell said. He originally thought inflation was transitory, but it’s now becoming frustrating.
When you step back, you look at wage growth in the US which is compounding at 3-4%. You’ve got higher energy prices. We’re actually near an oil price of $80. And you’ve got massive higher transportation costs — an example is the UK’s with their fuel and transport issues.
All of those issues, in addition to commodity prices that are at near-term highs, are all contributing to inflation that I believe will be more longer-term in nature then transitory.
So it’s interesting now that we’re starting to see the Federal Reserve think that way.
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Interviewer: How big a worry is China — be it the regulatory risk or real estate issues particularly around Evergrande?
Ashley Pittard: There’s no doubt China is a massive risk. The reason it’s a massive risk is because they’re trying to redistribute wealth. And whenever you try and redistribute wealth, people that have the wealth usually lose out.
So where is the majority of wealth situated in China? It is in the large property businesses. And more importantly, these large technology companies. As we’ve seen over time, restrictions being put in place which means the market will start giving a significantly lower valuation to these businesses on the tech side.
With regards to the real estate side, in addition to lowering house prices, these development companies have significant amounts of debt. And if you have debt, you can start getting into a situation that is very reminiscent of what we saw in the US housing market probably a decade ago now.
So the risk in China is very, very high because you’re redistrubuting wealth, the P/Es have to come down because of the increasing risk. And then you also have this debt burden associated with a reduction or slowing in property development, which is very reminiscent of what we saw a decade ago in the US.
Interviewer: So bringing that all to portfolio construction, what does it mean in terms of investing in global markets at the moment?
Ashley Pittard: We think that you want to be different. What do I mean by that? You want to be contrarian. If you look over the last five years, the best sectors to be in globally have been technology and pharmaceuticals. They are at all-time highs as a per cent of the index — and also their stock prices.
We believe, as inflation becomes more structural, that you want to be concentrated in a portfolio of financial and energy plus aerospace exposure.
So effectively we believe you want to be in re-opening plays and contrarion plays as inflation becomes frustratingly higher for longer and not transitory – just like Chairman Powell said.
Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.
Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.
Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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