Investment Insight |
Curiosity - three cheers for shares
Curiosity has led us to adapt our view on global share markets. To be curious implies eagerness to learn and to change. News flow is constantly changing and there are constantly new stories to understand.
Three themes reflected in our clients’ growth portfolios are different from our competitors’ vanilla portfolios dominated by New Zealand shares and bonds. In this insight we discuss our high conviction themes and how curiosity and adaptation will generate positive returns.
Small cap bounce back
While every company may be unique, a company’s total market value - its market capitalisation, or market cap for short - is widely used to create a context for judging that company’s financial performance and business outlook.
Small caps, or companies that have an average value of around US$2 billion or less, have disappointed share market investors for quite some time compared to their large cap counterparts. However, that leaves shares of smaller companies plenty of room to run if a rotation away from large technology shares, fuelled by progress toward a COVID-19 vaccine, takes hold.
Large companies may have less volatile share prices and be less sensitive to economic headwinds than smaller firms in many circumstances. On the other hand, smaller companies tend to have a tighter business focus. They may also have the potential for more rapid revenue and profit growth, but this potential is often more variable. As a result, small cap shares may be, on average, more volatile and more sensitive to macroeconomic shifts than the shares of larger companies.
We believe small cap shares are poised to disproportionately benefit from a fully-fledged economic recovery - not only based on fundamentals but also on positioning, given investors’ underexposure to small caps and heavy exposure to large caps, especially technology.
China dominance
In our 23 October 2020 | Investment Insight, we discussed how China’s leadership wants to utilise their high savings rate to incentivise domestic consumption. The Chinese government is also making significant reforms including moves to migrate household assets, predominantly held in real estate, into financial assets such as shares.
The reform includes the establishment of the Star Market, a Nasdaq-style technology focused market for Chinese tech companies. The listing process is being simplified and standardised to make it easier and faster for companies to list in China. For investors, these reforms also strengthen the availability of information, with requirements for more transparent and comprehensive disclosure, including environmental, social and governance issues.
NZ Funds sees the combination of political intent and significant capital creating a structural bull case for Chinese shares, and we are adding to positions so that clients can participate in this.
Australia, catch up!
Australian shares have underperformed this year compared to other global share markets including the United States and New Zealand. However, it is beginning to march to a different tune. As the United States and Europe contend with rising COVID-19 cases and the inevitable restrictions needed to control the spread, Australia is moving in the other direction. The supportive federal budget, re-opening of Victoria and dovish tones from the Reserve Bank of Australia (RBA) are all aiding a supportive sentiment.
Bank shares have also been supported by the prospect of a loosening of responsible lending laws and a view that bad debts could be ‘less bad’ than feared. Mergers and acquisitions are also an emerging theme in Australia, given low funding costs and a return of business confidence.
Quantitative easing from the RBA is a reason for us to remain positive on Australian shares. Looking forward, we anticipate further increases in quantitative easing to indirectly support the economic recovery. Australia is well placed with fiscal stimulus and low COVID-19 cases going into summer.
It is not just shares
Curiosity doesn’t stop at where clients gain their share market exposure. We have written before about investment in other asset classes including gold and Bitcoin. The investment thesis for Bitcoin is both simple and compelling, hence its global appeal.
Bitcoin is (relatively) accessible to all, is accepted worldwide, is not controlled by a central bank, and is limited to 21 million units. Bitcoin has many of the attractive properties that have made the United States dollar, oil and gold great stores of value for centuries. In addition, Bitcoin has modernised and improved properties that position it as an attractive complement.
Three themes reflected in our clients’ growth portfolios are different from our competitors’ vanilla portfolios dominated by New Zealand shares and bonds. In this insight we discuss our high conviction themes and how curiosity and adaptation will generate positive returns.
Small cap bounce back
While every company may be unique, a company’s total market value - its market capitalisation, or market cap for short - is widely used to create a context for judging that company’s financial performance and business outlook.
Small caps, or companies that have an average value of around US$2 billion or less, have disappointed share market investors for quite some time compared to their large cap counterparts. However, that leaves shares of smaller companies plenty of room to run if a rotation away from large technology shares, fuelled by progress toward a COVID-19 vaccine, takes hold.
Large companies may have less volatile share prices and be less sensitive to economic headwinds than smaller firms in many circumstances. On the other hand, smaller companies tend to have a tighter business focus. They may also have the potential for more rapid revenue and profit growth, but this potential is often more variable. As a result, small cap shares may be, on average, more volatile and more sensitive to macroeconomic shifts than the shares of larger companies.
We believe small cap shares are poised to disproportionately benefit from a fully-fledged economic recovery - not only based on fundamentals but also on positioning, given investors’ underexposure to small caps and heavy exposure to large caps, especially technology.
China dominance
In our 23 October 2020 | Investment Insight, we discussed how China’s leadership wants to utilise their high savings rate to incentivise domestic consumption. The Chinese government is also making significant reforms including moves to migrate household assets, predominantly held in real estate, into financial assets such as shares.
The reform includes the establishment of the Star Market, a Nasdaq-style technology focused market for Chinese tech companies. The listing process is being simplified and standardised to make it easier and faster for companies to list in China. For investors, these reforms also strengthen the availability of information, with requirements for more transparent and comprehensive disclosure, including environmental, social and governance issues.
NZ Funds sees the combination of political intent and significant capital creating a structural bull case for Chinese shares, and we are adding to positions so that clients can participate in this.
Australia, catch up!
Australian shares have underperformed this year compared to other global share markets including the United States and New Zealand. However, it is beginning to march to a different tune. As the United States and Europe contend with rising COVID-19 cases and the inevitable restrictions needed to control the spread, Australia is moving in the other direction. The supportive federal budget, re-opening of Victoria and dovish tones from the Reserve Bank of Australia (RBA) are all aiding a supportive sentiment.
Bank shares have also been supported by the prospect of a loosening of responsible lending laws and a view that bad debts could be ‘less bad’ than feared. Mergers and acquisitions are also an emerging theme in Australia, given low funding costs and a return of business confidence.
Quantitative easing from the RBA is a reason for us to remain positive on Australian shares. Looking forward, we anticipate further increases in quantitative easing to indirectly support the economic recovery. Australia is well placed with fiscal stimulus and low COVID-19 cases going into summer.
It is not just shares
Curiosity doesn’t stop at where clients gain their share market exposure. We have written before about investment in other asset classes including gold and Bitcoin. The investment thesis for Bitcoin is both simple and compelling, hence its global appeal.
Bitcoin is (relatively) accessible to all, is accepted worldwide, is not controlled by a central bank, and is limited to 21 million units. Bitcoin has many of the attractive properties that have made the United States dollar, oil and gold great stores of value for centuries. In addition, Bitcoin has modernised and improved properties that position it as an attractive complement.
Source: Bloomberg
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
***
James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
***
