Four key global themes are emerging from the latest February reporting season, proving that inflation is only one of many factors investors and advisers need to consider, according to global equities boutique, Swell Asset Management.
From fourth quarter reporting season in the United States and half year reporting season in Australia, Swell Asset Management has made four important observations:
- the extremely limited ability of governments, businesses and consumers to tolerate higher interest rates, due to ballooning debt
- the increasingly important role of technology to drive productivity, particularly among older workers
- the bifurcation of good tech and bad tech, and
- the predictable nature of quality companies.
Swell Asset Management Chief Investment Officer Lachlan Hughes said the real life consequences of unprecedented economic stimulus in response to COVID-19 were becoming apparent, with a distorted supply and demand dynamic pushing up prices and causing confusion in financial markets.
“In the US, many companies beat expectations this reporting season, largely because expectations have been depressed due to COVID-19, which begs the question, where to from here, given investors are basking in the afterglow of an unprecedented, coordinated central bank pandemic response,” he said.
“The quantum of global debt, which the IMF recorded as $226 trillion at the end of 2020, means there’s a greater sensitivity to changes in interest rates. Compounding this are significant demographic headwinds, as the number of people over age 65 doubles to 1.5 billion over the next 30 years.”
According to Hughes, the combination of demographic changes and technological advancements were creating opportunities for tech companies to support businesses and older workers to improve productivity.
At the same time, a bifurcation of good tech and bad tech was occurring, despite the recent technology sell off indiscriminately capturing all companies.
“Technology companies have benefited from greater institutional and retail attention, reflecting the significant growth of technology spend as a percentage of GDP, however, as inflation rises and fears about valuations climb, investors have responded by savaging technology companies,” he said.
“Unfortunately, good tech companies – characterised by strong earnings and attractive multiples – have been treated much the same as bad tech companies which have had their share price bid up to historic highs, off the back of overly-optimistic expectations of a potentially rosy future.”
He added that while inflation was currently dominating the headlines, it should not be the primary determinant of investment decisions.
“Amidst the volatility and noise, fundamental value is crucial because companies that provide high quality sought-after goods and services will perform strongly in the long term regardless of whether inflation is 2% or 8%,” Hughes said.
“Some things in life can be objectively predicted with reasonable certainty, such as which companies will lead in search or dominate cloud. Other things, like the direction of interest rates, are subjective and rely on factors that can’t be known in advance.”
“Investors should look for attractive companies that they want to own for the long-term and aim to buy them at a discount to their intrinsic value. This strategy will deliver significantly better long term returns.”
