In the US, equity markets were last year driven to a large degree by the strong performance of the FAANG (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) stocks, while in emerging markets, those managers with holdings in China’s Tencent and Alibaba, also did well.
After such a strong run, the question now is can this performance be maintained going forward?
At an Alpha Generators roadshow event yesterday Thomas Wilson (pictured), who runs the F&C UK Mid Cap fund, said he owns no technology stocks in his portfolio, labelling it a “hot area of the market”.
However Julian Cook, a US equity portfolio specialist at T. Rowe Price, disagreed and said contrary to what many believe, at current levels tech stocks don’t look expensive.
The case against tech
Wilson explained that investing in businesses, such as undervalued UK mid caps which are not necessarily hugely treasured, means “you can pick up some bargains because of the herd-like mentality out there”.
“I’m looking for businesses that are not particularly dependent on specific cycles, so I think returns are going to come from a part of the market that they haven’t for the last eight-to-nine years.”
Wilson said that he takes a long-term view and this lends itself to a slightly contrarian approach.
“We try to find businesses in under-loved parts of the market, facing short term headwinds, where because the market is so short term and doesn’t want to walk in to a profit warning, the discount it puts on that uncertainty is so high – it presents opportunities.
“I don’t own any tech, I don’t own any of what you would perceive to be general industrial businesses, because to me they are hot parts of the market, where the prospects of those businesses are more than fully priced in.”
Using the example of the John Laing Group (5.70%), his largest holding in the F&C UK Mid Cap fund, he said he looks for businesses such as these that focus on infrastructure rather than construction within the industrials industry.
“It’s looking for businesses that have quality characteristics that are not dependent on the economic cycle.”
The case for tech
While many may argue that tech is expensive, T. Rowe Price’s Cook said he does not agree.
“You’re seeing traditional companies change their route to market because of the internet,” he said. “It’s different and therefore it impacts the level of capital.
“These traditional value type companies are over time, getting disaggregated because of consumer choice.
“There’s a huge amount of disruption going on so it’s essential to understand exactly what’s going on in companies to understand which companies are taking advantage of this disruption and which ones are getting killed. You want that long term trajectory.”
Using the recent boost in online content, he discussed the Netflix vs Blockbuster debate. “At the time of Netflix, people wondered why they were separating online from DVDs, but now they are one of the largest content producers and who are Blockbuster?”
Big risk
Cook added that he believes the biggest risk to making markets stop is inflation. He said: “We know the direction of the Fed rates, we know that the balance sheet is getting shrunk after the hangover of quantitative easing, liquidity is a wash, and every asset class on the planet is expensive.
“Inflation is something we all have to watch, its currently what’s sustaining levels of this upper quartile valuation in the market place. If we see inflation pick up, that’s bad news for equities valuations across the board.”
