3/8/2021 11:00:00 PM

CIO Report: Pressure on for valuations

February was a busy month as usual with reporting season. This year companies had very solid results, and there were few disappointments from companies, however this was somewhat already priced into expectations and share-price reactions to strong results were often muted.

Interest rates continue to increase which is putting pressure on valuations, especially for long duration assets. The NZ market, with its high dividend yields, has been a beneficiary of falling interest rates for the last decade. Over the last 10 years the NZ market was one of the best performing markets in the world, in USD terms, with the UK market lagging significantly behind. The Nasdaq technology index was also impacted quite severely as it has a large representation of high growth companies that are more sensitive to climbing interest rates. Interest rates are difficult to forecast and if they continue to climb this will put pressure on valuations. However, the valuation reset will be a one-off event and over the medium term what is far more important to stock prices is a company’s ability to grow revenue, earnings and cash flow.

Vaccine rollouts are progressing well especially in developed countries. This has buoyed more economically-sensitive and recovery stocks, however it will be some time before the entire world is vaccinated and borders completely reopen to previous levels. I believe people will be cautious around the threat of travel being disrupted from future lockdowns and the cost of travel will also be elevated as a significant amount of capacity has been taken out.

Looking to the funds, the standout performers this month were Australasian Growth 2, Australasian Dividend and UK & Europe.

We have recently increased our exposure to a range of payment companies across our portfolios. Payments benefits from the structural megatrend from cash to card which was substantially accelerated during Covid. Small transactions which have been the domain of cash are now turning almost exclusively contactless. These are high margin transactions for payments companies like Visa and Mastercard as they earn a fee per transaction and also a percentage of the transaction value. Also, the US, which has been late to the contactless game, is catching up at a fast rate and their market is expected to grow from US 1 trillion in 2019 to 4.6 trillion in 2027. Business payments in the US are also moving away from cheque to electronic means. The only thing that held payment companies back last year was a lack of travel spend which typically has higher margin as it involves foreign currency translation and a lack of people spending on services such as restaurants etc . We think this will return over the next few years.

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Information is current as at 28 February 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.?

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