The transition from hope to growth |
Tweet | ![]() |
<p><strong>Lex Hall: </strong>Low rates, rising investor confidence and fear of missing out, it's a pretty heady mix and one that's helped fuel a spectacular rally since COVID first hit. With me to discuss that today and a few other things is Hamish Tadgell. He oversees a couple of portfolios at Australian equities manager, SG Hiscock.</p>
<p>Hamish, welcome to Morningstar.</p>
<p><strong>Hamish Tadgell: </strong>Thanks, Lex. Nice to be here.</p>
<p><strong>Hall: </strong>I thought I'd tackle you first up on a comment, which has sort of drawn a bit of attention and that was made a few weeks ago in <em>The Australian</em>. You said, you hinted that there might be a 10 per cent pullback in equities by year end. I was just wondering do you still have that conviction, and can I ask you to be a little bit more specific perhaps on when that might occur?</p>
<p><strong>Tadgell: </strong>Yeah. Thanks, Lex. It's headlines like that always seem to grab a bit of attention. Look, the context of really that we were saying that is that we've had a spectacular run clearly from the COVID lows in March. And it's not unusual for things not to move in straight lines, and we think there is the possibility that just given where markets have run to, but also the fact that a lot of good news has been priced in, and there clearly are still some risks out there that there is the possibility that we could get a pullback sometime over the next sort of six months.</p>
<p>Our overall view though is that policy remains very easy and really provides what we call policy put, that is that if markets falter or if the economy starts to stumble, governments through fiscal policy and central banks through monetary policy really indicated that they will continue to support the economy. And we think that that fiscal or policy put provides a support and should continue to support the recovery in economies. And I think just the RBA yesterday came out and highlighted that the economy is recovering faster than I think they expected. So, from the course of this year we think we're still in this period which we call this sort of the transition from hope to growth.</p>
<p>I might just spend a moment just talking about that. Really, what we've seen—if you—we do look at market cycles and we do think that cycles are important in terms of positioning, particularly in the types of stocks that we want to be in. But we've been through a period of despair, if you like, back when COVID struck. We think it was very much an event-driven crisis which distinguishes it from some other crisis that we've been through. But since March-April, we've really been in this recovery or hope phase as we call it, where there's the expectation of recovery on things getting better or lockdowns easing, economies opening up, vaccine news, et cetera. And through that hope phase we've seen really valuations expand as <a href="cmsgo+article:/#209391" target="_blank">earnings have continued to be downgraded</a>. And those are classic signs of a hope phase. We think we're moving or moved perhaps since the early phases of the growth recovery and really the growth phase of the market recovery we think probably kicked in about sort of October-November. And that's when for the first time really in 12 months earnings started to turn, revisions started to turn positive across the market at a market level. But more importantly, I think what we need to see is this continued transition from hope to growth. And reporting season will be very important in underwriting and underscoring that in confirming what earnings is—where earnings are, I guess, for companies.</p>
<p>The real distinguishing factor between hope and growth phases is that the growth is really characterized by earnings growth, not multiple expansion. So, companies need to—or the economy needs to grow into, continue to show recovery and companies need to grow into, I guess, those multiple expansions that we've seen. And as I said, there's risks around that, and it's not always—doesn't always go in a straight line and we might see market come back a little bit before it continues to go forward. And that's really the context of our comment. Sorry, long answer, but it's important to provide a context to it.</p>
<p><strong>Hall: </strong>Well, I should also point out that you're not the only one who's talked about a pullback. I mean, people like Jeremy Grantham have talked about that too. Let me just give you a quick overview of the SGH20 fund that you oversee. It's a benchmark unaware large cap strategy with the ability to invest up to 25 per cent of fund in small cap companies too. It was conceived in October 2004. It's returned more than 10 per cent since then, and it's outpaced the S&P/ASX 300 Accumulation index by more than 2 per cent. What are the top five heavy lifters if I can put it like that, Hamish?</p>
<p><strong>Tadgell: </strong>Look, I think as we are positioned today, over the last 12 months, I think stocks that have done very well for us have been things like James Hardie, NEXTDC, Saracen Minerals would be sort of the top three. As we sit here today, the top five active positions in the portfolio are Woodside Petroleum, National Australia Bank, James Hardie still, Uniti Group and Lendlease.</p>
<p><strong>Hall: </strong>Okay.</p>
<p><strong>Tadgell:</strong> We have shifted the portfolio a little bit in the last probably three or four months. And that really is a reflection of the shift from hope to growth as we've been saying.</p>
<p><strong>Hall: </strong>And you're optimistic about banks, too, Hamish, if I'm not wrong?</p>
<p><strong>Tadgell:</strong> Look, yes, we've become more positive on banks. So, we've been—we've still got an underweight position in the portfolio to banks, but it's the most—at least underweight I should say that we've had for probably 10 years and we are more constructive because if the economy is recovering, we think that that is positive for GDP and again, banks ultimately are probably one of the biggest proxies of GDP growth in the economy.</p>
<p>I think the other thing is that today the scarring from COVID has been less than what people would have expected. And therefore, mortgage defaults, foreclosures, all those business failures have been less and a lot of that is due to the fiscal support that's been provided by government.</p>
<p><strong>Hall: </strong>Yeah.</p>
<p><strong>Tadgell:</strong> I think the other thing is that the banks have really used COVID as an opportunity to help reset their social license. Clearly, there have been a lot of scrutiny, and rightly rightfully so, around the banks in the last sort of—or post-GFC really, and the Royal Commission and so forth has done a lot of reputational damage to the banks. They've had to pay out a lot in terms of penalties. And we think that that's easing. Those headwinds are easing. In fact, we're starting to see a few tailwinds.</p>
<p>The other big clearly headwind for the banks has been lower rates. And margin income has been impacted dramatically and that's made it tougher. And we're not of the view that rates are going to race away, but we do think that probably hit the lower bounds of where rates will go. And there is a risk over the next probably 12 to 24 months that we start to see a bit more inflation in the system and therefore, the pressure on interest margin should (ease) if not get any worse. And with that if the economy recovers, we think that you could see—we'll see some pickup in lending growth and loan growth.</p>

19/05/2022 Local investors were spooked after US retail giants Target and Walmart plummeted overnight as rising prices hit margins and inventory.

19/05/2022 On his recent visit to Australia, Morningstar's global chief investment officer Dan Kemp talks investing narratives, confronting the growing list of reasons to be concerned about markets and sustainable investing.

19/05/2022 Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.

18/05/2022 One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?

11/05/2022 Here's what investors who are worried about a recession should consider today.

11/05/2022 Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.

29/04/2022 Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine

28/04/2022 Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.

27/04/2022 Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.

31/03/2022 Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.

30/03/2022 Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.

28/03/2022 Where are entertainment and streaming services headed?

24/03/2022 Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.

23/03/2022 Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.

17/03/2022 Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls

15/03/2022 Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.

08/03/2022 Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.

03/03/2022 Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.

23/02/2022 Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.

23/02/2022 A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.

15/02/2022 In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.

13/02/2022 Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.

31/01/2022 The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead.

23/01/2022 Christine Benz discusses how investors should handle the turmoil, whatever the life stage.

18/01/2022 Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul.

17/01/2022 Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.

24/12/2021 Our experts and analysts weigh in on what mattered for investors last year.

21/12/2021 New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship.

10/12/2021 And how does it match up against gold?

10/12/2021 Australian miners to be among the last standing as coal use fades.

08/12/2021 Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation.

03/12/2021 The gold-rated fund manager shares three ideas with long-term potential.

01/12/2021 Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.

30/11/2021 To understand your fund, get to know its underlying index.

29/11/2021 These companies are set to profit from the move to clean energy, says Lazard.

24/11/2021 The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.

17/11/2021 And how investors can protect their portfolios.

08/11/2021 Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.

05/11/2021 Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.

19/10/2021 These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.

15/10/2021 The ESG outperformance narrative is flawed, new research shows.

06/10/2021 Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.

01/10/2021 And how G8 Education and Link Administration are positioned for long-term success.

30/09/2021 What Reporting Season August 2021 told investors about the health of the financials sector.

28/09/2021 a2 milk is an opportunity to be greedy when others are fearful.

23/09/2021 Covid's winners and losers are returning to their prior trajectories.

21/09/2021 Sequence-of-returns risk matters for both retirees and savers. Here's why.

20/09/2021 Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.

15/09/2021 Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.

14/09/2021 Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.

13/09/2021 Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle.

10/09/2021 Hydrocarbons poised for a comeback.

09/09/2021 Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.

08/09/2021 What shorting ETFs means for long-term investors.

07/09/2021 Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.

03/09/2021 Miners bask in the glow of iron ore prices while bargains remain in coal.

23/08/2021 Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.

16/08/2021 But the sector lacks uniformity, says Morningstar's Christopher Franz.

11/08/2021 Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.

11/08/2021 Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.

10/08/2021 Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.

05/08/2021 We believe the transaction has a high chance of succeeding.

03/08/2021 The industry still has significant growth potential.

03/08/2021 Is one of the biggest sponsors of the Olympics positioned for an all-electric future?

23/07/2021 Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.

22/07/2021 Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.

21/07/2021 The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.

20/07/2021 The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.

12/07/2021 Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.

08/07/2021 Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.

08/07/2021 Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.

06/07/2021 Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.

02/07/2021 PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.

30/06/2021 Iron ore prices have been on a tear, boosting the profits of Australia's top miners. How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.

28/06/2021 Morningstar has recently initiated coverage of a food delivery app and a consumer finance product.

24/06/2021 Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.

22/06/2021 Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig

21/06/2021 Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.

18/06/2021 A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.

15/06/2021 Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.

11/06/2021 Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.

10/06/2021 Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.

09/06/2021 Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.

08/06/2021 They’re building an empire.

07/06/2021 A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.

04/06/2021 As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio

03/06/2021 The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.

28/05/2021 4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.

28/05/2021 The SEC continues to sort out its regulatory concerns.

27/05/2021 We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.

25/05/2021 Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.

24/05/2021 Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.

19/05/2021 American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.

18/05/2021 Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.

18/05/2021 Square's Bitcoin purchase is more marketing than operations

10/05/2021 If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.

07/05/2021 Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.

05/05/2021 Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.

04/05/2021 Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.

30/04/2021 The stock market and the economy are not the same. Here's why.