Bell AM nervous of market vulnerability

The strong market rally during January and February has left Bell Asset Management nervous of the potential disappointment from earnings.

The ASX 200 had returned 6.6% since the start of the year while the S&P 500 in the US had returned 7%. The tech-heavy Nasdaq index was up 14% over the same period.

In a market commentary for its Global Emerging Companies fund, managers Ned Bell and Adrian Martuccio, said they were concerned this performance would leave markets vulnerable to disappointment.

“The incredibly strong rebound in global equities has arguably taken us back to position where markets are vulnerable to disappointment on the earnings front,” they said.

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“The fact that global equities appreciated by more than 7% led by growth stocks (+9.7%) is indicative of a market that doesn’t essentially believe the rhetoric coming from the US Federal Reserve and is pricing in the goldilocks scenario whereby inflation collapses, we skip a recession and rate cuts eventuate in the back half of 2023.

“We are increasingly of the view that there is a growing disconnect between equity markets and underlying conditions. As far as equities are concerned, they are only 14% below the recent highs of Jan 2022 while conditions have changed materially.”

The managers felt their chosen allocation approach of strong quality bias and valuation discipline would work against a possible challenging backdrop in 2023. Year to date, it had seen a portfolio rally thanks to an overweight in technology, including six of its top 10 holdings, a lack of energy or utilities exposure and an underweight to Japan.

“We feel that 2022 was an anomaly in that quality as a style rarely lags when inflation is at elevated levels. We expect this anomaly to correct itself in 2023 & 2024 and therefore expect a solid period of relative performance.”