Most complex market backdrop in 40 years: Platinum

Rising inflation and the conflict in Ukraine mean markets are likely to remain volatile for some time to come, say Andrew Clifford, Clay Smolinski and Nik Dvornak.

Investors should brace for further volatility after 2022 started with markets being rocked by soaring inflation and the outbreak of war between Russia and Ukraine, the trio said.

Global stockmarkets had sold off during the opening three months of the year after inflation reached multi-decade highs and pushed central banks such the Federal Reserve and the Bank of England to hike interest rates. The Reserve Bank of Australia, which had not lifted rates since November 2010, was widely expected to hike next month.

In addition, the conflict in Ukraine had dented investor sentiment and exacerbated the supply bottlenecks that were already pushing inflation higher. Both Russia and Ukraine were major exporters of key commodities, in particular energy commodities from Russia and food from Ukraine.

In their latest update, the managers said: “The economic and geopolitical backdrop for markets is the most complex it’s been for over 40 years.

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“In such an environment, one might expect that investors would be demanding a significant increase in risk premiums, yet the world’s major stock markets are only down 5-10% from their recent highs. The one exception to this, is China, which is down 30%”

They added that how markets proceed from here is likely to “vary greatly”, depending on the sector and geography where stocks reside.

The managers said those shares that have been hit hardest in recent weeks were those that were directly impacted by the conflict in Ukraine, including cyclical stocks such as auto original equipment manufacturers and component providers, industrial businesses, European banks and travel-related businesses.

Chinese stocks had faced a “broad and indiscriminate sell-off” because of geopolitical fears and the weak economic outlook amid another coronavirus outbreak.

“In many cases, stock prices have approached crisis-level valuations seen in previous sell-offs, such as the global financial crisis or March 2020 Covid-19 sell-off,” Clifford, Smolinski and Dvornak said. “Many of these companies represent excellent value and we would expect them to perform well in the medium term, as Europe and China recover and uncertainties dissipate.”

However, the managers said the same outcome might not be the case for growth stocks, which led the decade-long bull market that followed the Global Financial Crisis but were more vulnerable to rising interest rates.

“Investors have subsequently returned to these companies as a place to hide, though we would expect this to be relatively short-lived as interest rates maintain their march higher. In particular, our assessment is that the highly speculative growth stocks (i.e. those with extremely high valuations, often trading on valuations in excess of 20x sales) still have considerable downside,” the managers said.

Against this backdrop, Platinum International has long positions in companies with profitable businesses that have some cyclicality and are trading at attractive valuations. The managers said that significant exposure had been taken to decarbonisation, travel, semiconductors, healthcare, Chinese consumers and well-priced financials, while shorting “popular and expensive” growth companies.