The CIO of global equities boutique manager Bell Asset Management has drawn attention to the disconnect between earnings growth and share prices, particularly for small and mid-cap companies.
Speaking at a virtual event held in Melbourne, Ned Bell noted that companies in the MSCI World Index had recorded 37 per cent growth in earnings per share this year while the market had recovered around 30 per cent from pre-COVID levels.
“Earnings have had this amazing recovery, but the market hasn’t necessarily kept up,” he said.
“In the small and mid-cap market, the disconnect between the earnings recovery and the price recovery is effectively around 40 per cent. That represents a massive opportunity.”
Mr Bell said he did not believe the situation was currently well understood by the market.
“The earnings recovery is being driven by a revenue recovery driven by government measures to help the economy but also a lot of the temporary cost reductions driven by COVID-19 are likely to become more permanent,” he said.
Bell Asset Management anticipates earnings growth will continue despite signs of slowing GDP growth globally.
The firm is forecasting global GDP growth of 5.9 per cent in 2021 and 4.5 per cent in 2022, while growth in China is expected to fall from 8.1 per cent this year to 5.5 per cent next year as the country’s property market crisis continues.
“You have a situation where GDP is starting to moderate at the same time as inflation is rising,” said Mr Bell.
Decelerating growth in China and rising inflation globally could have a significant impact on emerging markets, according to Mr Bell.
Higher commodity prices and rising wages are expected to underpin a “steadily growing inflation rate”.
“Wage inflation is becoming more of an issue, and we believe this is going to be an issue for some time,” said Mr Bell.
“One of the side effects of COVID-19 is that you have a lot of people rethinking their lives and their willingness to work, and this is causing some real labour constraints across multiple geographies and multiple industries.”
Locally, underlying inflation reached 2.1 per cent in the September quarter to enter into the Reserve Bank of Australia’s target range of 2 to 3 per cent.
The RBA is expecting wage growth to reach at least 3 per cent before increasing interest rates, compared to growth of 1.7 per cent recorded by the Australian Bureau of Statistics in the year to June.
