Meryl Pick analyses the current global market downturn as it enters into bear market territory; with interest rates rising and tech stocks falling after their recent meteoric rise, causing investors to flee.
Bruce Whitfield 00:11
Onto something altogether less cheerful than we've been talking about this evening: losing market share in the mining sector, running out of fuel at airports, and running out of steam on markets. Meryl Pick is a Portfolio Manager at the Old Mutual Investment Group, on the line to us from Cape Town this evening.
And the global markets, Meryl, are... I hate to say freefall, but we are, in terms of the Nasdaq, very much in bear market territory. We're down 24% or so in this current sell-off right now. There are bear markets popping up all over the place - a bear market being a short, sharp fall of more than 20% in the value of an index.
Meryl Pick 00:49
Good evening, Bruce, and good evening to your listeners. Um, ja, unfortunately, that is the case. I suppose in the wake of Covid, and the Covid crash in 2020, you know, we talked about the fastest crash that we've ever seen, but also one of the fastest recoveries in stock markets that we've ever seen. And of course, one of the reasons for that was so much global liquidity going into financial markets. Meaning central banks, you know, basically pumping money into the system to support the economy, but also in supporting asset prices and supporting markets.
And I think over the last few months, the US Federal Reserve has been signaling their narrative slowly starting to change about inflation being transitory, to then actually becoming a real concern. And they have begun to tighten that, by tightening interest rates. So, it's a reversal of the stimulus into the economy and into financial markets that we saw in 2020.
And I think, particularly, as you mentioned, the Nasdaq, assets that have got long-dated expectations for cash flows to come through, a lot of the tech stocks, you know, it's an invest now and reap the benefits later. Grab market share, build it, and they will come. Those valuations work when interest rates are low. As interest rates go up, those valuations are quite a lot more sensitive. And I think, look, it makes those companies look less attractive. And I think that a bit of that steam is now coming out of the market as reality starts to get in.
Bruce Whitfield 02:47
Yeah, absolutely. And that reality is brought forward. The so called "FANG stocks", Facebook, Amazon, Apple, Netflix, and Google. The Facebook share price is down - for this year alone, so since the first of January - down 41%. Amazon is down 33%. Apple is down 14%. Netflix is down 71% and Google 21%. At some point, at some point, Meryl, it's worth going, my goodness gracious me, yes, these things were ridiculously expensive when they were being punted by some punters on social media as being sort of like, you know, "if you're not invested in these things, and you invested on the JSE, then you're an idiot and a lunatic". And suddenly, you've seen a good chunk of your money evaporate in a very short period of time. But at some point, they're worth buying. I'm not too sure if that time is now or anytime in the short term. But what is your sense of it after short, sharp sell-offs like this? Do we expect short sharp recoveries too?
Meryl Pick 03:47
it's tempting to think that, right. But I think one's always got to go back to first principles and any investor institutional retail should have a framework for one stock. So, our framework works around human price, and we take a long-term perspective. So, if we look at the themes driving the tech sector over the last 20 years and how we've gotten to this point, cheap money has a very positive theme or i.e. a strong tailwind. That has now become a negative theme, because from here, we see interest rates going up from historically low levels. There's only one way to go, which is up. And that trend can play out for quite a long time, that theme can be quite enduring.
The other thing that we've started to see, whether it's in Europe or in China, is regulation, anti-monopoly, anti-trust, and scrutiny around the network effects that the tech sectors have had. I mean, this is what has made the business models so attractive. Um, but populations - let's say the population, and then government on the behalf - are starting to scrutinize the power and the concentration of market shares in these companies. That we see is another negative.
During Covid, wow, all of these companies had the wind at their backs, because we were all at home, consuming social media, streaming, all sorts of things. And I think probably they've taken up the next two years’ worth of organic sort of growth and front loaded it all into 2020. So, that looking forward now is also a negative theme - where is the volume growth coming from, where the new subscribers coming from? So, the prices are not falling in a vacuum. I think that's important for investors to take heed of. And having had such a long trajectory of growth, nothing can continue growing at those rates forever, they would take over the world. So, one has to then start to think what is a more normalized growth rate look like? Are we there? Or is this a blip? And what is the multiple you'd be willing to pay for a more normalized growth story.
Bruce Whitfield 06:19
I wonder if, Meryl, you ever - like I - look at this and say, but markets are responding to stuff that we've known was inevitable for at least six months, maybe even longer. You guys with shiny crystal balls at Old Mutual, probably saw it a year ago, knowing that when the pandemic ended, fewer people will be sitting at home on their iPads looking at rubbish content and consuming data and doing all of that sort of stuff. Eventually, we would change our habits again. And so, you would release some of the shares you might have bought in Netflix a while back, or whatever the case is, you would have managed your portfolios. But suddenly, one person wakes up one day, and goes, oh, my goodness, me, it's all over. Run! And it's like shouting "fire" in a cinema and waiting to see who gets trampled as they go out the door. And it's just this weird repeat pattern in markets. It is so disconcerting.
Meryl Pick 07:13
Ja, the market psychology of it. So, I mean, our easiest way to play it for our clients is via Prosus and Naspers, which obviously have exposure to Tencent. Now, Tencent has its own specific issues pertaining to Chinese regulation. But everything's attractive at a certain price. So, you know, we were cautious. We have had a much lower exposure to Naspers and Prosus than we have had in the past when the money was cheap, and the growth story was very much intact. But at this point, to your point, when something has de-rated and fallen off that much, we are certainly paying attention and saying, okay, there is still a business model here, maybe it's not going to be as profitable and fast growing as it always was in the past. But, at a certain point, you know, one would get back in.
For where we are, as in Naspers and Tencent, we don't think that is the point just right now, but the time will come. As for the FANG, I suppose my caution is... [laughs]. The percentage fall should not be the thing that informs the decision. It's going back to basics and saying, what would I pay for this business? What does the future of this business look like for the next five to 10 years? And what would I be willing to pay for that today? And not to extrapolate the growth rate of the past two decades, or the Covid period for that matter, into the next five to 10 years. Because I do believe it will be slower.
Bruce Whitfield 08:55
Perfect. Thank you, Meryl Pick, Portfolio Manager at the Old Mutual Investment Group.