A lack of alternatives and strong liquidity will see equities offer better value in the long run than most other asset classes, according to DNR Capital’s chief investment officer Jamie Nicol.
Although there were substantial risks in stocks as markets would be emerging from the darkness of a shutdown, the speed and shape of the recovery would have a substantial impact on the valuation of various equities, Nicol said.
According to him, forward earnings multiples rebounded astonishingly quickly from the crisis, reflecting the market’s willingness to look through the next two years to a strong bounce back in FY22 earnings.
At the same time, investors tended to be positioned overweight cash and underweight equities while cash and fixed interest offered little return and office and retail property carried significant risks at present.
“The risks appear more balanced than they did a few months ago. While we expect ongoing economic recovery, and see equities as better value (in the long run) than most asset classes, the uncertain climate, strong bounce and lack of absolute value support suggests volatility can emerge and should be expected,” Nicol noted.
As a consequence, the company said it had made a number of moves aimed at shoring up the resilience of its portfolio as an uncertain environment was an opportunity for quality companies to win market share and it had seen a number of companies in its portfolio step up their plans.
Companies like James Hardie Industries and Cochlear were expected to continue to win market share and invest in new product while peers retreated, according to DNR Capital.
At the same time, fund manager cash balances remained elevated and had manifested a challenging performance headwind.
This positioning would provide a tailwind to equities and reinforced a “buy the dip” mentality during periods of volatility.
The key bear points, according to Nicol, were the possibility of a COVID-19 second wave and whether the economic recovery would be sustainable. On top of that, uncertainties included the US election, with the expected outcome (according to betting markets) of the upcoming US election to swing from a likely Trump second term to a Biden victory and questions around the market’s likely reaction to a Democrat presidency and potential Democratic-controlled Senate.
Other geopolitical uncertainty included recent development in Hong Kong with China’s imposition of new security laws, tensions between the US and China and a deterioration in relations between Australia and China which has been observed since the Government threw support behind an investigation into the source of COVID-19.
