With expectations of earnings to recover with in the next two to three years, Bell Asset Management expects there is an idea of a “hockey stick” shaped recovery for small/mid cap equities.
Ned Bell, chief investment officer and portfolio manager, said one of the most interesting parts of this market was the idea that there is a very large earnings recovery to come in the next two to three years.
“The last two big earnings troughs were the dot-com bubble in the early 2000s, at that point you saw global earnings fall by 40% and then recovered by 200% over the subsequent five years,” Bell said.
“Post Global Financial Crisis (GFC) saw earnings fall by 46% and then recover 65% in the subsequent four years or so.
“What came after that recovery is phenomenal performance in small/mid cap equities… in absolute US dollar terms, just by allocating to small/mid cap equities, you would have gotten a return of 221% and 231% [after each respective crisis].”
Global small/mid cap: post-crisis rebound
Bell said it was possible to buy these stocks in the trough and then generate a huge return.
“This year, earnings are down 30% for the MSCI World index, but then in small/mid cap stocks they’re down 51% so they’ve taken a big hit,” Bell said.
“And there’s this idea there is a big hockey stick to come and that’s where investors can really make a lot of money in the next couple of years.
However, some sectors like technology, had already pulled earnings growth forward.
“In many ways COVID-19 has precipitated two to four years of earnings growth pulled forward into one or two years,” Bell said.
“The steepness of the earnings growth this year has been quite steep and if you take [FAANG stocks], those names have grown earnings by an average of 26% and they’re trading 44 times earnings.”
The three year sentiment was echoed by SG Hiscock who also expected earnings to return to normal in that time frame.
When it came to other thematics, many of the current COVID-19 darlings still had value as there would not be a quick or complete transition to pre-COVID times.
“Work from home is not going to go away completely, it’s going to be with us a long time,” Bell said.
“In term of discretionary stocks, two thematics being home improvement and there’s loads of leisure activities where people are staying at home and they’re doing up their pools, tinkering with their cars, and their vacations are more about camping.
“Is that going to completely change back to travelling overseas next year? The reality is no one is going overseas for a long time so we would argue there’s quite a long journey to these themes.”
