Applying the adage, ‘déjà vu all over again?’, the head of multi-asset described the US earnings season, saying while the S&P 500 index showed its companies delivering roughly 4% growth in both revenues and earnings, this "made sense" as the economy was growing at a similar rate (in nominal terms).
However, Ventre noted that while fund managers – responsible for a lot of investment – prefer growing companies – he said with corporate growth rates falling and valuation multiples expanding, it was becoming increasingly difficult to justify the large sector of the stock market with such large investment potential.
'Eye-wateringly expensive'
"The result has been investors crowding into a number of high growth names which, although eye-wateringly expensive on many measures, have the potential to grow into and beyond their stock prices," he said.
"Simply put, with growth in short supply, the market is attaching a higher price to the growth that it can see. This is doing what a market is supposed to do, finding a price where there is a balance between supply and demand."
Ventre said while current market conditions were not as extreme as in 1999, the two environments shared some characteristics.
"These include the use of unconventional valuation measures (multiples of eyeballs being my personal favourite) and big first day IPO pile-ins for companies that have done little more than use the right buzzwords like 'social media', '3D printing', or 'the cloud'. Still, it is different this time – taxi drivers are not giving me stock tips. This is a professional mania not an amateur one."
Stocks that move past "the anchor of understandable valuation metrics" are in a world of their own, he said – the world of momentum.
"In the world of momentum there will be some long-term winners, just as there were plenty of long-term winners hidden in the 1999 bubble. Yet once you have entered that momentum phase it works both ways. There are stocks out there already down 30% to 50% from their peak, but that dip is hard to buy because in many cases they are just back to trading at fourth quarter 2013 prices.
"The high growth names may have a lot further to fall. On the other hand, this might be one of those healthy 'refresh and renew' market corrections which bull charges go through. Time will tell, but for the moment I am in capital preservation mode," he explained.
Ventre called this a 'mini-mania' only affecting a narrow part of the market, and said he would favour managers who were disciplined and experienced.
"If you have seen 'it' before, like I have, then you are better able to manage through it even if there is no certainty as to how it will end. Meanwhile, the best asset class in this environment looks to be emerging markets, where you can now buy decent growth prospects at discounted valuations," he added.
