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Investment cycles shifting

Investment cycle Macro policy

Macroeconomic policies and events are shifting the way investment markets work, but have opened the door to new opportunities.

The shape of investment cycles has changed, with markets being skewed by macroeconomic events and policies that are creating sharper peaks and troughs, but also providing new opportunities, according to an Australian investment manager.

SG Hiscock and Company head of Australian equities Hamish Tadgell said the task of trying to pick stocks based on prices and earnings was being reshaped, changing perspectives of where markets were in the current cycle.

“It’s important to recognise that equity markets are increasingly being driven by macro policy and structural events and there is a divergence happening from the traditional industrial earnings cycle, which is typically determined by ‘hope to growth’ and ‘pessimism to despair’-type phases in equity markets,” Tadgell explained.

“This shift is important to recognise because it is leading to higher levels of volatility and returns dispersion with sharper cycles, that is, higher highs and lower lows, as well as greater oscillation away from the typical industrial earning cycle.”

He pointed out this raises the question of what phase equity markets are currently in.

“The early part of the cycle is typically characterised by hope where valuations go up on the expectation that growth and earnings are going to improve and there are elements of that in the market at the moment,” he noted.

“The later part of the cycle is typically characterised by growth slowing, high but falling capacity utilisation, tight monetary policy, rich valuations and there are elements of that at the moment too.

“It’s quite confusing as to where we are in the equity market cycle so I would argue that we’re probably more mid-cycle. The reason for that is we have got the strength of labour markets, wage growth is still evident, fiscal spending has remained expansionary and there is the prospect of rate cuts coming if the economy slows.”

Tadgell revealed, despite the skewing by macroeconomic events, the firm’s focus remained on valuations and a margin of safety.

“We are focused very much on the quality of the businesses we find and on the competitive advantage they have got and that they will be able to face into some of these challenges that we are talking to,” he said.

“As such, two areas are interesting to us still, of which the first is energy transition. It is an undeniable trend supported by government policy here and in the US and we are seeing the right incentives in place to induce companies to invest in this area.

“The second is that there is an undeniable thematic around the storage of data and artificial intelligence is feeding very strongly into this and driving an insatiable demand for digital infrastructure, so things like data centres and businesses exposed to these tailwinds will be things we’re looking at.”


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