Ned Bell said that while it’s no secret that large caps have led the market higher, it’s an “incredibly skinny rally” led by only a handful of stocks – and the party has to end sometime.
“The magnitude of that differential was so high last year, it’s frankly extremely difficult to see how that can continue. And I think there’s a much stronger case for that to then revert. The companies are terrific, they’re great businesses – but they’re so over owned. Not only by growth managers, but by value managers who are probably in fear of their life,” Mr Bell said.
Mr Bell noted that blue-chip companies such as Amazon had been beneficiaries of COVID-19, but that as the global economy emerges from the pandemic they could “take back what they’ve given the market” over the last several years.
“You could make an argument that some of those companies have had two or three years of earnings pulled forward into 2020 but what that means is going into 2021, when that growth rate starts to pancake, the multiples will compress because the growth rate is slowing and you’re getting inflation ticking up which is terrible for high PE stocks,” Mr Bell said.
“In terms of the small- and mid-cap stocks, it’s like the Christmas present hasn’t been opened yet. The second half onwards when people start coming out of their apartments and there’s this huge pent-up demand – let’s face it, the US economy is all about consumer…there’s a lot of pent-up demand pre-stimulus, and now you add stimulus on top of that.”
Mr Bell conceded that Bell AM had lagged the benchmark over the last three months and that its value-based investment approach was “out of favour” during a period of intense speculation over assets “it wouldn’t touch with a barge pole”, but remained optimistic about the outlook.
“The reality is you go through this every five or 10 years…the good news is that always coincides when we find the absolute best opportunities to add to the portfolio. We’re still finding really good things to buy at a time when markets are at their absolute high, the speculative frenzy is there for everybody to see,” Mr Bell said.
