There is a growing mismatch between valuations and fundamentals, contributing to “crazy” multiples and a growing propensity to invest based on momentum, according to Martin Conlon, head of Australian equities at Schroders.
Conlon noted that the intense focus on technology was particularly surprising during the recent reporting season. In particular, he highlighted the “ridiculous” scale of investor reactions to what were, in most cases, “very small” earnings surprises, as demonstrated by WiseTech Global in the Australian market.
In a recent webinar, Conlon explained that although WiseTech Global’s revenues increased by $250 million and profits increased from $300 million to $380 million – largely due to acquisitions – as well as 60 million more in capitalized R&D, the market capitalization jumped by more than $9 billion, which he pointed out is “bigger than most companies in Australia, not to mention the price movement “.
The stock notably jumped 17 percent on the day of its earnings release, driven by rising profits and growth prospects, and as of September 9, it was up more than 60 percent since the start of the year. ‘year.
Such optimism demonstrates how the rapid rise of the technology sector has led to “pretty crazy” price-to-earnings ratios, Conlon said.
“I think we all know [tech is] at the epicenter of the world’s speculative activity, the Nvidias of the world in the United States. That’s where prices can move the most and people are attracted to the prices that move the most because they like to make money quickly,” he said.
Conlon noted that while the ASX is relatively expensive compared to other global markets, widespread enthusiasm for growth, particularly in markets like the US and India, is driving up valuations as investors are flocking to growth opportunities.
“People run to where the growth is. Markets like India, [they’re] very expensive because it’s growing,” Conlon said.
“Mention growth and investors get excited. »
However, as fundamentals appear to take a back seat to growth, the investment chief stressed the need for caution.
“It worries me how many fundamental investors look at these reactions and then internalize this behavior in such a way that they almost lose sight of the fundamentals and become momentum investors themselves,” he said.
“I think this is one of the most dangerous trends in the stock markets.”
Areas of Promise
Conlon observed that while markets are generally expensive, most of the high valuations are concentrated in a few sectors such as IT, leaving room for opportunities in less inflated areas.
“I think it’s very difficult to argue that any place looks cheap relative to interest rates, so market prices and asset values in the real estate and stock markets remain quite expensive in relation to history. But if you dig beneath the surface, most of the market, which is expensive, is actually driven by a few very high-priced sectors. IT remains the main thing,” he said.
For investors looking to extend beyond this narrow rally, Conlon recommended areas such as resources, materials and energy, which are trading at “very normal multiples.”
Also present at the webinar, Justin Halliwell, head of research at Schroders, said the results in mining were remarkable.
“One thing that struck me about the results in the mining sector was that profits remained stable, both in terms of prices and costs, which is unusual particularly in the upscale areas of the city,” Halliwell said.
Moreover, as steel companies face shrinking margins as China’s steel exports approach a record 100 million tonnes, he believes most investors are missing the long-term opportunity.
“Even though logic suggests that supply will decline and margins will rebound, the time frame required for logic to prevail is often longer than expected,” Halliwell said.
“Companies with healthy balance sheets and a strong cost position will be well placed to benefit from the inevitable improvement. »
