The analogy between the current state of global equity markets and the cycle of Venus, characterised by extremely slow rotation between the sunrise and the sunset, indicates that after the very long cycle markets are getting closer to the peak and things might change.
This is the crux of the ‘Sunrise on Venus’ whitepaper published by investment manager Orbis, a sister company to Allan Gray, which notes that while the days on Venus are long, the same goes for the investment world, where growth and passive strategies have “enjoyed a long day in the sun” and investors positioned themselves as the sun would “never set”.
The last decade was defined as a “fabulous time” for the owners of financial assets, to say the least, helped by globalisation, higher corporate profits, reduced inflation and relatively low interest rates.
However, all of the above produced a large group of investors who have become too complacent instead of preparing their portfolios for ‘sunrise’, or in other words, properly diversifying across exposures and across styles within equities.
Orbis investment specialist Eric Marais, says he was surprised by lack of preparedness by investors.
He notes that the data in the whitepaper found that Australian advisers are overweight to growth investments whether its in pass or active globally equity funds.
“It is really surprising to us that investors have not repositioned more aggressively for what looks like a changing environment,” he says.
Asked where he sees the most elevated risks, Marais pointed to the fact that global indices have a disproportionally high representation of the US growth stocks, and in particular mega cap technology, shares.
“If you look at the MSCI world index, which is meant to be a globally well diversified broad index, about 70 per cent of that index is made up of the US shares,” he says.
“A big chunk of that is, what I would call, growth oriented shares, made up of companies that have had high growth and the investors [willing to] pay premium for that growth.”
Marais says that while the overexposure to these areas was less surprising in case of passive strategies, the active managers were thought to take a slightly different stance.
He says that given the continued flows into passive options, the current trends were reinforced as every new dollar that flows into a passive fund buys proportionally the shares that are in the index today.
But he warned that as long as the existing trends keep improving, that works well, but if things do change that would be where all the risks can strike.
Where expectations are low
As a contrarian investor, Marais says his firm remained very focused on valuation, given the traditional value stocks looked to be unusually cheap whereas traditional growth stocks were unusually expensive.
Instead of going after the top end of the market and the “magnificent seven” – large cap tech darlings Alphabet, Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla – investors can still find “tonnes of opportunity” in other parts of the market.
“Diversification benefits to the value style, a contrarian style in particular, tends to have the exposure to parts of the market that very few others are finding exciting,” he says.
“Our founder [Allan Gray] liked to say – you are wasting your time if you are looking at things that performed exceptionally well over the last decade or so. It is much a better idea to go and look at places where things have been lagging for the last five to 10 years, a depressed cycle that really gets interesting because expectations are low.
“And low expectations are magic because it means that sometimes the outcome doesn’t even have to be good, it can be bad and the stock will still do well if the market expects the outcome to be terrible.”
