‘Investors need to stay in equities for longer’

36One portfolio manager Evan Walker believes the potential for continued earnings growth will support global markets, despite high valuations.
Image: Michael Nagle, Bloomberg

36One Asset Management increased its offshore equity exposure in the last quarter. And the boutique’s preference is still for companies listed in the US, despite what many see as stretched valuations.

“I think you need to step back for a second,” said Citywire AA-rated Evan Walker, who co-manages the 36One BCI Equity fund and 36One BCI Global Equity feeder fund.

“We are going to see global GDP growth in excess of 6.0% this year. And given the pent-up demand, the huge amount of savings in the world, large infrastructure investment from governments and the impact of the restocking cycle, we are probably going to see GDP growth of around 4.0% in 2022.

“This is in an environment where you just don’t get paid to save. Cash is giving you almost nothing.”

This informs 36One’s decision to remain overweight equities, and US stocks in particular.

“You have to be exposed to equities for longer,” Walker said. “The last two months have been tough, but you have to stick out these cycles. We are seeing businesses showing incredible growth, and earnings projections are still good. We’ve seen the likes of Alphabet growing its revenues by more than 60%, even off the high base set last year.”

Vaccine impact
While the spread of the delta variant of Covid-19 has rattled markets recently, Walker said that the efficacy of vaccines was clear when looking at rates of hospitalisation and mortality.

“The vaccines are working,” he said. “People are starting to get their lives back to normal in developed markets. We have a predominantly developed market focus, and we think that will continue to work over the next year and a half.

“Equity markets seldom underperform in strong GDP growth environments, which we are going to continue to see into 2022 and 2023.”

Walker added that the jobs recovery in the US in the past few months has been stronger than in previous recessions. In his view, this is an indication of the robustness of the economic recovery.

(Click to enlarge)

“It does bring the risk that inflation might be higher for longer. But we are still of the view that inflation will be transitory. It will take 12-18 months to work its way through. But, certainly, the growth element will drive equity markets higher.”

Valuations
This is why 36One remains comfortable with high exposure to the US.

“We see valuations as relatively supportive,” Walker said. “The S&P 500 is up 17% this year, but a lot of company earnings have surpassed those levels.”

He added that even though the index is trading on a 21-times-forward-earnings multiple, the strong profits that companies have been reporting suggest that the index level can still go higher. Some estimates suggest that the S&P 500 could reach 5,000 this year, which is still more than 10% above its recent high.

“We like these big-earnings companies, like Visa, that are still driving big growth, and big returns on capital,” Walker said. “They are not cheap, but they are still growing well ahead of what you can get from a cash return.

“Globally, you are not being paid to save. You need to stay in equities for longer or you are going to miss out on what we think is going to still be a very robust return from equity markets over the next 12-18 months.”

Over the three years to the end of June, the 36One Global Equity fund (into which the 36One BCI Global Equity feeder fund invests) returned 13.5% per year in US dollars. Over the same period, the MSCI World Index was up an annualised 12.5%.

Patrick Cairns is South Africa Editor at Citywire, which provides insights and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Like saying employees need to go back to 30 year jobs to be taken credibly.

No.

I bought an S&P500 ETF a few months back and it’s up 21% I think these guys are doing the right thing.

Completely disagree. Time to reduce equity exposure. This secular bull mark will end with a bang. I do however agree that we’ll see a final rally to the top and s&p 500 @ 5000 very likely over the short term, but after that a deep bear market will follow. Portfolio managers live in a dream world!

The creation of the cheap money solution to the investment banking corruption induced systemic collapse of 2008 has so far proven itself to be very good at achieving the same purpose as the corruption. Accordingly this solution is preferably here to stay. This will make the US markets continue their bull trend for ever. This is why interest rates must stay under control. Unfortunately there is no such thing as perpetual motion. Especially the kind of perpetual motion that delivers endless free lunches for all eternity. The lockdown insanity has triggered the long awaited inflation monster its partner in economic destruction, the interest rate monster. Now we are told that the fuse will only burn for 18 months and then it will put itself out before the bomb goes off. The fuse is lit and no one actually knows how quickly it will burn until the bomb is reached. This is uncharted territory to say the least. But what do I know?

The 2008 words “too big to fail” may yet come back to haunt the wise men at the Fed.

If they cannot raise interest rates then surely they are not in control any more.

End of comments.

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