The rotation into low multiple stocks has gathered pace this year, following an acceleration in the vaccine rollout combined with additional stimulus.
The US economy is motoring, thanks to a fiscal-driven consumption boom, while lingering restrictions in Europe, from a slower than expected vaccine rollout and less stimulus, sees the eurozone limp along. Europe’s manufacturing activity has been supported by China’s robust recovery, but the services economy remains stubbornly below trend. Arguably, Europe has the most cyclical economic upside as the rollout in vaccines accelerates.
The amount of stimulus undertaken by policymakers globally has reached astonishing levels – with 40 per cent of all money ever created occurring last year. Quantitative easing is now being used to fund aggressive fiscal stimulus, which suggests the rebound in the economic cycle is still in its early stages.
By the middle of this year, we estimate US households will have above-trend excess savings of $3trn – about $1trn of underspending in 2020 and $2trn from income stimulus – when a full reopening of the economy is scheduled. Even if just one-third of this is spent, it equates to 5 per cent of GDP.
Policymakers globally are expected to remain accommodative and vaccines provide the scope to pivot stimulus away from income support to investment programmes – such as Biden’s Investment and Infrastructure Bill. We expect other economic blocs to follow suit.
Decarbonisation, which is already a central pillar of policy across the US, eurozone and China, will benefit. Renewables only account for 7 per cent of total energy output across the globe and needs to increase to substantially above 50 per cent to meet emission targets under the Paris Agreement. Indeed, we see a multi-decade investment cycle for green electricity.
While the market has begun to view economically sensitive stocks through a different lens, cyclicals are still broadly cheap relative to defensives. Investment -led stimulus/growth can lead to a more permanent shift in investment preferences, and a more durable outperformance of low multiple stocks – like after the 2000 tech wreck. There will be new candidates that can transition to secular growth winners and some of today’s perceived winners will be revealed as growth traps.
Meaningful opportunity in relative valuations
A natural healing in the global economy from an acceleration in vaccines can be supported by stimulus, but reopening remains fluid. Our exposure to reopening beneficiaries remains firm at about 40 per cent, though exposure within these clusters will rotate as reopening evolves.
The $1trn in underspending in 2020 was concentrated in the services sector, but there is a natural limit to travel consumption and dining out, for example, and households could direct excess savings to big ticket items.
Consequently, we have rotated our reopening cluster to position for consumption trends we believe will emerge, such as autos, while reducing exposure to reopening candidates that have already seen strong performance – such as financials, retail, and international-dependent travel.
Globally, we expect monetary and fiscal policy to remain loose, with a focus on government sponsored investment programmes. Our portfolio has 30 per cent exposure to investment stimulus beneficiaries – led by our decarbonisation and connectivity/compute clusters.
We believe Siemens and Volkswagen, two companies traditionally labelled as ‘cyclicals’, can transition to secular growth winners.
VW’s all-in approach to electrification can see the company take market share as EVs take an increasingly larger slice of the auto pie.
Siemens, a global leader in factory automation, will be a winner in a low carbon world as manufacturing lines are re-designed and re-tooled. Additionally, Siemens’ subsidiaries manufacture wind turbines and equipment required to fortify the grid.
Finally, we have 25 per cent of our portfolio exposed to long-term structural growth trends like social commerce, online advertising and workloads moving to the cloud. These trends will continue to grow even in a fully reopened environment.
Facebook and Microsoft are the definition of pragmatic value – as the resilient businesses are exposed to long-term structural trends and are valued at attractive multiples relative to the growth profiles.
Workloads will continue to move to the cloud, now led by the enterprise, and Microsoft has the enviable lock over this customer.
As for Facebook, it is the winner in a world where e-commerce is increasingly influenced by social media. Monetisation can inflect as users consume within the Facebook ecosystem and as the platform continues to take share in online advertising due to user engagement.
More broadly, headline equity index valuations may look full, but there is meaningful opportunity in relative valuations. Multiple dispersion is high both between and within sectors as investors chase conceptual names – while ignoring some of the more resilient exposures available at more attractive valuations. This presents a great opportunity for an active manager.
Jacob Mitchell is chief investment officer and founder at Antipodes Partners and portfolio manager of the Antipodes Global Fund Long UCITS. The views expressed above are his own and should not be taken as investment advice.