Fantasy

Much has been made of the ice-cool testimony of Fed Chief Jerome Powell last week. A nonchalant noting of the current itch in the bond market but a general disinterest in doing any scratching. Yields, post a bumper jobs report, resumed their grind higher. Investors, meanwhile, hold their breath. Don’t fight the Fed says the tea towel, for good reason. But the committee’s resolve is likely to be put to the test by a bond market that is increasingly excitable after a near forty-year bull streak. The implications for everyone and everything, from pension funds, to ARK, to those value managers still in business, are big. Very big. Hence all the headlines in big bold letters of the reflation trade. Sell tech, buy banks. And energy. As ever though, the headlines are perhaps a bit lazy, too sweeping. Perhaps the rotation of recent days is less about growth versus value and more about what was hot is now not. Take the ARK effect. The marketing of an innovation fund at a time of rapid technological change, and when the fiscal canon squared up to anything dubbed green, is an easy affair to a retail following that buys tellable stories over steamy valuation. The liquidity of many holdings might yet turn risk meetings at ARK a little clammy, should the recent selling start to accelerate. So too SPACs. A broker reports that their tradable proxy for the pre-merger SPAC segment continue to plunge, and the phone is ringing for custom built SPAC hedges. In similar fashion, renewable names have caught a cold, and once in-it-to-win-it factor plays like momentum have taken an elbow to the nose. Whilst value vs growth is an easy, catch-all headline to write, perhaps the current market zeitgeist is better explained by the inevitable unwind of stocks whose prices had become detached from underlying fundamentals. It is, as the brokers suggest, more a case of Fantasy vs everything else. Given Tesla is found in 209 ETFs, it could all get a bit squeaky if the recent selling picks up steam. Fabled FAANG stocks like Google and Facebook, meanwhile, are arguably cheap. Certainly cheap relative to the growth outlook into recovering end markets such as advertising, and palpably cheap when considering the potential upside from currently unprofitable assets that litter their respective portfolios. As the retail money might soon find out, when it comes to both price and valuation, it is always better in the long run, to buy low and sell high.

The securities mentioned in this blog may be held by funds managed by Majedie Asset Management Ltd.