Argonaut’s Barry Norris has backed energy to be the best performing sector – again – this year and Russia as the best market, while taking a negative view on growth and speculative technology.
Norris, who manages the VT Argonaut Absolute Return fund, predicted that bond and equity markets would deliver negative real returns this year, that the 10-year treasury note would hit 2.5%, the oil price would go above $100, energy would be the best performing sector in 2022 and technology would be crushed by hawkish Federal Reserve policy.
“A lot of them are already coming true,” he said, noting that the “market dynamic has already moved on from the leaders of the previous bull market”.
Norris runs a combination of long and shorts in his VT Argonaut Absolute Return fund and, based on these outlooks, was long on reopening trades and energy this year, while taking his biggest shorts on what he called “speculative tech”.
On his long holdings, Norris said that he was more bullish on the reopening trade in markets after being hesitant about them in 2021.
“Back then we, controversially said the vaccines wouldn't stop infections, and obviously we've been 100% right on that,” he said, referring to the outbreak of Omicron at the end of the year which put Covid risks firmly back on the table for investors.
This variant has proven to be less lethal, albeit more contagious, meaning that the “hardest parts of the pandemic are probably behind us,” Norris said. This will allow for reopening trades in travel and leisure that faded out last year to build momentum and returns this year.
This feeds into Norris’ second bullish position, energy. As the demand for transportation fuel increases, the oil demand and price will go up.
The global oil supply is facing a years-long bottleneck caused by the world’s goal of transitioning away from fossil fuels and oil to renewable energy in the coming decades, putting a definite expiration date on the product.
Western oil companies, in particular, have not invested in new long-term oil mining projects “meaning they’re not replenishing their reserves and, as a result, you'll get much higher oil prices for a longer period of time,” Norris said.
But until that transition is made oil and other fossil fuel energy sources are still going to be required. To capitalise on this Norris has taken long positions on Russian energy companies, including Gazprom, the country’s biggest business.
“Even if you think that current gas spot prices are unsustainably high, they could fall by half and Gazprom would still be on three times earnings with a 15% dividend,” Norris said.
He added that president Vladimir Putin’s potential invasion of the Ukraine is a risk to this view, “but I think that’s pretty unlikely to happen”, he said.
Meanwhile, an end to the pandemic could be “bad for markets”. The pandemic has kept interest rates down and validated a lot of extreme fiscal policy, which will normalise post-Covid. If this were to happen, it would push the investment case even further away from growth stocks, which have led equity markets when vast amounts of liquidity has been available.
“We've had 10 years where all the managers that did fantastically well were growth and all the managers that did anything else did fantastically badly. And I don't think that was just because suddenly all the good stock pickers became growth managers and vice versa,” Norris said.
Most managers describe themselves as bottom-up investors but Norris said that many underestimate the impact that the macro can have. If that changes “the growth managers that have done the best from that macro set are inevitably going to be the most vulnerable to a change in investment styles when the music changes”.
Already this year, growth has endured some significant sell-offs catalysed by expected fiscal policy changes – fears carried over from 2021. Over the past 12 months MSC ACWI Growth index made 9.2%, behind the MSCI ACWI Value index (17.3%) and in the opening weeks of this year the former was down almost 7%.
Some investors might argue that this could be a good entry point into those funds who have a great 10-year track record, but Norris said if inflation becomes more structural, interest rates rise and valuation “actually becomes important again”, this will go against growth.
“I think that we’re in a multi-year period of not just growth underperforming value, but of a 1970s redux where bond and equity markets underperform inflation for several years,” Norris said.
The Argonaut manager is therefore avoiding unproven parts of the growth space, such as crypto, which he described as “the poster child of speculation”.
The digital currency phenomenon has been popular with retail and individual investors but with the changing fiscal environment currency is becoming a better store of value “and we’re still waiting for a use case for crypto”, Norris said.
The biggest short in the fund is US electric truck manufacturing firm, Rivian, which has a market capitalization of $75bn. It is larger than the well-known German rival Volkswagen Group, despite not selling nearly as many vehicles.
“That’s exactly the sort of thing that we’re talking about in terms of speculative tech. It’s late to the party in terms of electric vehicles (EV). It has production problems and even if management execute on their business plan, which I think is highly unlikely, I still think that the stock is 95% overvalued,” Norris said.
Rivian declined to comment.