IT’S A PERFECT time to be a contrarian investor.
If you ever wanted a reason for investing in global energy and financial stocks, have a look at their weighting in global indices relative to technology and healthcare stocks, says Pendal’s head of global equities, Ashley Pittard.
Not since the tech boom in the late 1990s and early 2000s have technology and healthcare stocks played such a dominant role in global indices — as you can see in the graph below.
The two sectors contribute about 43 per cent of the MSCI World index, led by Apple which recently passed the $US2.5 trillion market capitalisation point.
You have to go back even further to find a time when energy and financials have been so unloved, at least in a relative sense.
Even though the past six months have seen an improvement — due to upward revisions in earnings forecasts — the two sectors now make up just 18 per cent of global indices.
“You’ve got people in extreme index positioning – index funds and active investors are in tech and healthcare, and extremely underweight energy and financials,” says Ashley Pittard, head of Pendal’s Global Equities boutique.
“It’s because no-one believes inflation is coming.”
Inflation is the critical factor going forward. It’s true that during the past decade, the lack of price rises has meant growth stocks were a good place to be.
“But now we are getting to an inflection point,” Pittard says. “Globally, earnings are beginning to broaden out.”
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In the Unites States, there was earnings growth of nearly 100 per cent during the June quarter, led by basic materials, financials and materials.
It was even higher in Europe, with earnings growth of more than 240 per cent.
“And inflation is increasing. The argument is whether it’s transitory or structural — but we know there is inflation and it’s higher than it’s been over the past 10 years,” Pittard says. “Wage inflation is still compounding at around 3.5 per cent.”
Long term bond yields remain very low, supporting the argument for growth stocks like technology and healthcare companies.
“This is a timing issue. One day you’re going to get inflation that’s going to be more structural than transitory. It’s going to come via wages and commodity growth. And that will come back to money supply.
“Money supply is up 25 per cent year-on-year.” Pittard explains. “There was similar money supply growth after the global financial crisis. But back then the money stayed in the financial system and didn’t get in the mainstream because regulators increased banks’ capital ratios and buffers.
“Fast forward to today, the money is going back into the real economy. And when you get that much money going into the money supply, you will see inflation.
“You are already seeing that in house prices and second-hand cars,” Pittard says.
“To me this is a timing issue about when you see inflation coming through. That will feed back into this extreme index positioning of energy and financial being on their knees, compared to healthcare and technology.
“When inflation does come back through, that’s when you want to be in financials and energy.”
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.
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