It’s (not) the economy, stupid
May was another month of strong returns for equity markets and now some markets, such as the technology focused Nasdaq, are trading at record highs and well above where they started the year. This highlights the unpredictability of markets how they turn far before the economy does and the difficulty of predicting short-term movements.
Markets continue to climb the wall of worry and investors are cautious about what happens when the government stimulus life support is taken away. If economies are stuttering when support is withdrawn, I believe governments will simply reintroduce more government stimulus. The next round of stimulus, however, is likely to be more targeted towards particular industries that have had growth curtailed rather than the blanket-based emergency approach introduced hurriedly across the world in March.
From my perspective I keep reminding myself the stock market is not the economy. The wider economy is suffering and there have been significant job losses, however, listening to many public companies in calls they are faring amazingly well during the downturn. These companies are typically larger, more resilient and will come through the crisis in a stronger position than the many smaller companies that comprise the economy. Furthermore, 20% of the S&P500 is made up of the five largest stocks Microsoft Apple, Amazon, Google and Facebook which all have strong balance sheets, structural growth trends and wide economic moats and are likely to continue outperforming the wider economy.
In May we saw laggard stocks such as small-caps and cyclical businesses outperform as investors became more confident, about the global recovery as lockdowns eased in most developed world economies.
The Australian small-cap market in particular had a strong move as more-out-of favour sectors like financials, materials and consumer discretionary outperformed more defensive sectors.
The theme of capital raisings continues, as companies prefer bulletproof balance sheets to survive even the worst-case scenarios, although often it comes at the expense of excessive dilution to existing shareholders.
Our market exposure has increased slightly during the month as stock prices of our companies have risen and the last of our market hedging was removed. We have also increased our currency hedging during May as the NZD will appreciate as markets and economies recover.
On a portfolio basis Growth 2 had a standout month with adroit stock picking and portfolio management from Chris Bainbridge, to maximise returns from the positions.
Overall, we remain constructive on equities as the worst of economic drawdowns have likely passed, they are cheap compared to other asset classes and in a world with little-to-no growth and minimal interest rates they deserve to trade at higher valuations than they have in the past.
Please find below updates for May supplied by each of the portfolio managers.
Thank you for entrusting your capital with us.