Speaking at the Stockbrokers and Investment Advisers Association (SIAA) 2024 Conference in Melbourne this week, Platypus Asset Management’s head of investments stated that he believes the stock-picker’s market of 2023 has extended into 2024. However, he cautions that this situation can still “turn on a dime”.
Reflecting on the performance of growth stocks last year, Platypus’ Prasad Patkar explained that their outperformance was primarily driven by a “massive” reset of expectations regarding interest rates.
“If you cast your mind back to November 2021, we were expecting the Fed to raise rates three times in all of 2022, and they ended up raising rates around 14 times. That was a big adjustment, that was a big headwind for growth stocks,” Patkar told audience members.
However, markets adjusted to the new reality, marking the first step towards growth regaining a foothold.
Platypus Asset Management’s Australian Equities Fund returned 22.1 per cent during the year ending 31 March 2024 and was among the top 10 performing funds in Mercer’s latest investment survey.
“In the back half of 2023, it became more of a stock picker’s market, where earnings started to get rewarded again. So, if you delivered on your earnings expectations and your outlook was strong enough to have revisions in the positive, the stock price was responding to those revisions, and whether you were a growth or value stock at that point didn’t matter,” Patkar said.
Regardless of the label, whether a growth or value stock, those that delivered on earnings saw positive effects on their prices, while companies that failed to meet expectations were “crunched”, he said.
“We believe that has extended into 2024, but look, that can turn on a dime. You could get a bad inflation print tonight, suddenly yields spike and everyone forgets the bottom-up and returns to macro again – but so far, so good on that front,” Patkar said.
As investors continue to gauge where inflation and interest rates may land this year, Patkar described Platypus AM’s outlook as “reasonably constructive”.
“There’s nothing so far that suggests the wheels seem to be coming off in the economy. I think it would be fair to say people were expecting a recession at the back end of 2023, in the middle of 2023, but it keeps getting pushed out, so I suspect there’s a lot of underlying strength in the economy, probably driven by consumer in the Western world,” he said.
He forecasts this to continue carrying the economy “for a little bit longer”, though spending will eventually be curbed as interest rates begin to pinch.
“It’ll stop at one point, when people have to pull the spending in and interest rates will have an impact. The long lags, as it’s been famously called, they’ve been quite long and they haven’t come through just yet, but I suspect they will at some point,” he said.
Looking ahead at the next reporting season in August, Patkar predicts it will be benign.
“If I had to take a very short-term view, [it] should be benign. We expected February to be benign, it was, and I suspect nothing dramatically different about August. If the economy holds up reasonably well, February next year might be similar,” he said.
“To be honest with you, it suits our style of investing if things soften a bit, but I don’t see that coming through in the next little while, so it’s reasonably positive.”
Meanwhile, Vihari Ross, portfolio manager at Antipodes, described how the fund manager is considering various market scenarios, noting that “there’s no way” the initial market expectations of six rate cuts and no recession will materialise.
“Now the market is pricing in maybe a couple of rate cuts and a benign, smooth landing. The risk then becomes, what happens if inflation stays high and the Fed can’t cut? I wouldn’t price it as optimistically as the market has priced it, we don’t know what is going to happen here, but we can see those pressures on inflation pressures,” Ross said.
For this value investor, the next step boils down to assessing the business’ value and identifying “where a benign scenario is priced in and where it isn’t”.
She observed a dispersion in the US market between expensive and cheap stocks, with undervaluation seen in “less buoyant” parts of the economy such as manufacturing, which has been in recession for the last 18 months.
“If you get a benign scenario, there is an opportunity for those companies to inflect, and that business-to-business activity starts to reinvigorate,” she said.
However, she noted, in a negative scenario, global cyclicals and energy companies could be impacted.
Ross also described the automobile sector as an “interesting” space.
“The average age of car fleets in the US is the highest ever and there’s a replacement cycle to take place. We’re looking for those idiosyncratic supply and demand opportunities. The other big tailwind there is the shift to electric vehicles as that starts to get rolled out, and there’s companies all around the world, not just in the US, that can take part in that.”
Ross suggested that while there is “overpriced quality” in the market, especially in the US consumer sector, there are still plenty of inexpensive investment opportunities available.
