The market is spooked – ‘no love for equities’

You can also listen to this podcast on iono.fm here.

SIMON BROWN: I am chatting with Nick Dennis, who manages the Anchor Global Equity Fund. Nick, I appreciate the time. You did a presentation yesterday around how the market is spooked. It’s actually weird. I was talking with a friend yesterday and saying to him, you know what, there’s certainly value out there, but the fear is frankly, I don’t know, at elevated levels.

One of your slides was headed, ‘No love for equities’. The other, ‘The end of the world is nigh’. Again, there certainly is pessimism and in some cases fairly extreme pessimism out there in global equity markets.

NICK DENNIS: Morning, Simon. Absolutely. This shows up in survey data and it shows up in investor positioning. I guess it’s not the kind of fear that you see right at the end of the capitulation phase in the bear market, as in maybe March 2009, but it’s certainly very, very pessimistic – and with good reason.

There is plenty to worry about. Inflation has been sticky; you’ve got a tight fit. It’s not without cause that people are feeling cautious. But I guess my point yesterday was [that] to the extent that it’s positioned for and already expected, it’s less of a risk from an equity market perspective.

SIMON BROWN: That’s a great point. If everyone’s out there expecting it and acting accordingly and worried, etc, it means it’s kind of in the price. And it does mean that there are some really chunky valuations out there as a result, because of that fear. And often that’s when the real opportunity comes.

NICK DENNIS: I think so. So look at the overall market level. I wouldn’t say it’s cheap. There’s perhaps a paradox. So, I’m saying at the overall market level it’s not stupendously cheap, but people are positioned cautiously. Look, could things get worse, could outcomes be worse than the consensus expects? Yes. But even in that case, if we were to see the kind of waterfall capitulation and the economy got really bad, you would have to think that the policy response would be equally vociferous. So I look at that set up and say net-net it probably makes sense to lean more on the bullish side.

SIMON BROWN: And the other slide, which was China – the cheapest chips; I’ve been chatting around China a bunch, probably over the last six months with commentators. There certainly has been the one view. There are some folks who look at China and say, ‘uninvestible’. There’s another view which says, you know what, there’s always risk in the investing world and there’s some quality here. Look, you’re comparing forward PEs – Amazon versus sort of Alibaba, JD.com and the like. There are real values in some of these stocks.

NICK DENNIS: I think I’m certainly not a structural China bull. I think there are plenty of reasons to be concerned. I probably also take the view that China, from my perspective, is more tradable than investible. This is not a set it and forget it decision.

But to your point, I think the risk-reward or sort of upside relative to the downside set-up is really attractive. I think the potential exists for you to make a lot of money in these shares relative to the potential downside [that] exists. So that’s kind of all you are looking for as an investor for an attractive setup, and I think you don’t need a lot to go right for you to make a lot of money in these shares.

SIMON BROWN: That’s a great point. I liked your point there that you don’t need to be a big, long-term China bull. You can see some opportunity there and say, hang on, these are cheap. Yes, there’s downside risk, there always is, but that downside risk is perhaps more limited, and it becomes ‘what is my potential payoff versus my potential downside?’ Truthfully, none of us knows the future. It’s about managing that risk more than anything.

NICK DENNIS: Absolutely. And even if you look at the case of Japan over the last 20 to 30 years, the market has done nothing; but there have been some fabulous bottom-up opportunities in that market. And I think China could be the same.

I would say shorter term there are some tailwinds. So I think you’ve got the tailwind from the economic reopening after the really draconian Covid lockdowns, and then the central bank wants to stimulate and is pumping credit into the market. So I think you’ve got a window where you could see earnings re-accelerating. From a tactical perspective there, I think the setup should be quite good.

SIMON BROWN: And even taking it back to the US, a stock you put up there was Cloudflare. I remember when Cloudflare hit some $200/share in sort of late 2021. I was chatting with someone and it was like, ‘this is a great business, but this is not a great price for that business’. We’ve seen a number of those tech stocks and those real quality assets come back markedly and again offer some opportunity there, notwithstanding the risk. There’s always risk out there.

NICK DENNIS: Yes. I think Cloudflare’s a great example. If you look at the, the ARK ETF, which is run by Cathie Wood, it is a kind of a proxy for mid-cap growth. It has completely unwound all of the gains of that it made in 2020/2021. I’m looking at the chart now. It’s sitting below its Covid lows.

A lot of these companies were never expensive; they were never cheap to begin with, but they did become ridiculously expensive.

And now they’ve sort of unwound that and then some, so they’ve still got a bright future ahead of them. I still think a bunch of these names could become multi-baggers. I think Cloudflare sits in that camp potentially. So now again, I don’t think it would take much for you to do really well out of these shares over a two to three to five-year horizon.

SIMON BROWN: And in the case of ARK – I’m looking at that chart – you’re basically back at where it was five years ago. Yet these companies are bigger. They’ve grown their revenue. In some cases, they’ve even cut their cost base more recently with layoffs and the like.

We’ll leave that there. Nick Dennis is the fund manager at the Anchor Global Equity Fund. Nick, appreciate the early morning insights.

Listen to the full MoneywebNOW podcast every weekday morning here.