The Point

Global equities: It’s time for ‘Covid losers’ to shine

What can investors learn from US earnings as big-tech layoffs continue?

For equities investors, 2023 will be a story of correcting a “misallocation of capital” that occurred during the pandemic, says Pendal’s head of global equities Ashley Pittard.

“You don’t want to be in the Covid winners, you want to be in the Covid losers.

“There has been an over-investment in technology and the cloud and a misallocation away from industrials, supply chain, energy and those sorts of companies.

“You’re now seeing that misallocation of capital unwind.”

As for the big picture, a weaker US quarterly earnings season indicates a recession is likely next year, says Ash.

But there’s evidence US companies are rebuilding supply chains post-Covid, which should soften the impact as capital spending offsets slowing consumer demand.

Global Equities: How US earnings are likely to land

Next week we’ll start to find out how US companies fared in the September quarter – and expectations are low.

“We expect continued volatility,” says senior global equities analyst Sue Scott.

“This is partly because the market is finding it very difficult to gauge how a reversal of Covid spending is affecting operating conditions, alongside higher interest rates and inflation.”

US shares ended the quarter broadly where they started, trading at about 15 times expected earnings.

“But that’s only useful if you believe the ‘E’ in the price-to-earnings ratio,” says Sue. “That’s the big debate.

“The market is still expecting growth – both in the third quarter and in 2023.

“But the real difficulty for investors is making sense of conflicting data.

“Companies are reporting numbers that could reflect deteriorating consumer health – or it could just be a reflection of dislocation in global trade and spending patterns as a result of Covid starting to normalise.”

Global equities: where tech investors should be looking now

For a decade the tech sector was a darling among global equities investors — providing outsized returns on the back of transformational breakthroughs in personal technology, cloud computing and streaming entertainment.

This year higher interest rates triggered a sell-off across the sector as the current value of future cash flows reduced and some emerging companies found it harder to raise capital.

But there is still opportunity in the sector for selective investors, says Sue Scott, a senior investment analyst in Pendal’s global equities team.

Take a look at makers of analog semi-conductors — essentially the eyes and ears of electronic devices, which translate real-world signals into digital messages.

They’re in cars, battery chargers, air conditioners, electric grids, medical devices, factory robots and more.

Analog semis are a good example of how an index approach to technology misses the nuance in individual sectors, Sue says.

Global equities: Is it time to be fully invested?

It’s time to be fully invested in financial markets, not sitting on the sidelines, says Pendal’s head of global equities Ashley Pittard.

Earnings seasons in the US and Europe have been strong, and there are signs inflation is peaking, which would allow the US Fed to slow its interest rate cycle, says Ashley.

On a sales basis, about half the companies beat consensus forecasts. On an earnings basis that rises to nearly two-thirds.

There have been exceptions, says Ash. “But when you look at this market, it’s one that you want to be fully invested in.

“We are at the point where the Fed might pause for a bit, or only has a couple of rate rises to go and earnings are growing around 5 per cent.

“That’s a good position for equities because the price-to-earnings multiple on Wall Street has come back to more normal levels on a historical basis.”

Global Equities: where to hunt as big tech stocks drop

Rates are rising and long-duration assets like big US tech stocks are underperforming.

Where should investors look?

“The world is normalising and people don’t need as many streaming services,” says Ashley Pittard, Pendal’s head of global equities.

“People aren’t buying as much stuff online. They’re going out again and eating a meal.

“That’s why in the current earnings season in the US we’ve seen Amazon and Netflix disappoint but Coca-Cola’s numbers were fantastic.

“Coca-Cola is in a duopoly market and it’s got pricing power. In an inflationary environment, that’s what you want.

“Covid brought forward demand for many tech products. There are supply chain problems and higher input prices.

“And rising interest rates hurt long-duration assets because the discount rate applying to future cash flows increases.”

Be wary of the FAANGs and look for companies that can move prices with inflation, says Ashley.

Ashley Pittard: US Fed may stretch out rate hikes

The humanitarian crisis in Ukraine caused by Russia’s unprovoked invasion must be our first concern says Pendal’s head of global equities Ashley Pittard.

Assuming a peaceful resolution is found, what can global equities investors expect in terms of economic recovery?

While bourses have sold off, particularly in Europe, history tells us equity markets typically recover within a year, says Ashley.

“On average, markets fall between 4 and 15 per cent in the near term after an attack,” says Pittard. “When it looks like someone is getting control, usually a year after that equity markets are higher.”

The war means global central banks won’t be as aggressive raising interest rates as they would have been otherwise — especially in Europe, believes Ashley.

“The Fed will have to raise rates but maybe it will do it a bit slower because it won’t want to be too aggressive when there’s a war on.

“It means there could ultimately be more interest rate hikes, though they may be delayed.”

Global equities: where to hunt as tech rotates to value

“Last year was a tale of two halves,” says Pendal’s head of global equities Ashley Pittard. “The first was about re-opening and the second was about Delta and Omicron.

“This year will also be a tale of two halves. The first half will be all about inflation and higher interest rates, volatility and rotation out of tech stocks.

“The second half will depend on how well the Fed does its job. Will it go too hard and push the economy into recession or will it do enough to cap inflation and not kill the business cycle?”

If we get get “four rate hikes, and not six or seven” there should be a re-rating of the market in the second half,” says Ashley.