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Plenty of global equity upside for those who look

Glenn Freeman  |  28 Mar 2018Text size  Decrease  Increase  |  
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Contrary to much of the rhetoric, investors can still find plenty of upside in stocks if they look hard enough, according to T. Rowe Price association portfolio manager, Hari Balkrishna.

Even looking at the US share market, which is currently the most expensive in the world and above its long-term average price-to-earnings multiple, "it is still within the realms of what I would say is reasonable," says Balkrishna.

"I'm not standing here saying markets are cheap and we should be loading up the truck, what I'm saying is markets, for all the rhetoric out there, in my view, remain within the realm of reasonableness.

"As long as you're thoughtful in how you go about stock-picking, I think you can still generate meaningful upside in an absolute and relative sense, even from here."

From a macro-economic perspective, he refers to the upward pressure on interest rates, particularly the Federal Reserve's recent rate hike.

"Inflation has picked up some, I'd argue largely driven by the increase in oil prices, but it still stays pretty subdued for this point in the cycle.

"So, when you think about the bookends of inflation, they were much higher in the past - we're debating about whether inflation is going to be 1 or 1.5 or 3 per cent, so when you think about a structural outlook for inflation, our view is still that inflation stays pretty subdued," Balkrishna says.

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Looking at equity markets in emerging regions alongside the MSCI World, he says they are both in line with their 20-year averages.

Growth versus value

For some time, there has been debate about whether the long run of success enjoyed by growth-oriented companies will continue, and whether investors should instead begin over-weighting portfolios to value.

"I would actually argue…in looking at disruption and technology, that this cycle can probably go on for a little longer than we think, structurally. And the reason for that is when we think about the power of disruption that's hitting the market from a range of industries…the true big growers in the market are growing almost regardless of the macro.

"In an otherwise low GDP growth / low inflation world, the scarcity of growth is pretty acute, and so we're willing to pay a multiple for that, and I'd argue that multiple isn't even that egregious," Balkrishna says.

In highlighting the effect technology and innovation are having on businesses across markets and sectors, he points to automation and his experience of numerous visits to the Japan-based factory of a client.

"With literally not a single human being on the factory floor, that for me is the future, that is where we're going."

What it means for investing

"I think it's really important for us to search for stocks on the right side of change," Balkrishna says.

"In spite of the advent of things like passive investing and ETFs, I think it's really important to understand that betting on the things that are going to be on the right side of change will be extremely powerful. And in my view, those stocks probably continue to perform, because the trend is so powerful and so secular…it isn't cyclical."

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Glenn Freeman is a senior editor at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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