In today’s Money Morning…value stocks get momentum…wider acceptance that macroeconomic factors are going to change…putting it all together…and more…
Editor’s note: In today’s video I look at the charts of two popular ASX tech ETFs and discuss what would need to happen for a value shift to actually happen. Please click the thumbnail below to view.
There was a pretty big tech sell-off overnight in the US.
This has people thinking a shift to value could be on after a long wait.
For evidence of this, check the recent movement in the Scentre Group [ASX:SCG] share price.
The retail-focused A-REIT was up big yesterday, more than 14% in the end.
Before this, the NASDAQ 100 [NDX] started to sell off.
All of this was on the vaccine news we covered yesterday.
Meanwhile, the BetaShares S&P/ASX Australian Technology ETF [ASX:ATEC] sold off as well.
Heavily weighted towards Afterpay Ltd [ASX:APT], this was an understandable move too.
But at the same time the ASX 200 [XJO] is set to rise, despite the NASDAQ’s fall.
What’s going on here?
Firstly, a lot of it has to do with macroeconomic sentiment.
Secondly, another thing to know is that many of Australia’s most exciting tech companies aren’t on the ASX 200.
It’s heavily weighted towards mining and financials — the barbel economy.
Which means if the value shift is on a few things would need to happen.
Let me take you through the three phases that will be required to prove that this is the case.
Phase #1: Value stocks get momentum
It would take a sustained push from beaten-down A-REITs that aren’t Goodman Group [ASX:GMG], as well as companies like Cimic Group Ltd [ASX:CIM] and Lendlease Group [ASX:LLC] for me to be convinced.
Convinced at least, that it’s on the cards.
Without wading too far into the thicket that is the world of bonds, the Australian Financial Review has a good explanation of what’s happening:
‘As longer-dated, risk-free government bond yields rise, the steeper yield curve signals investors expect inflation and growth. This means the longer-dated expected cash flow growth of tech businesses becomes less valuable to investors.’
There’s a healthy debate in our virtual office about deflationary and inflationary scenarios.
I lean towards an inflationary scenario — one that could make commodities and particularly resources in Australia look very attractive.
That’s the central thesis of our ‘Supercell’ idea in Exponential Stock Investor, which you can learn all about right here.
Phase #2: Wider acceptance that macroeconomic factors are going to change
This will take longer.
We’d need some more data about the vaccine, to be sure.
Much of the world is still suffering, while Australia is emerging relatively unscathed compared to say, Europe and the US.
Phase #3: Earnings confirmation
We had a mixed earnings season a few months back so this will be the final piece of the puzzle.
You could see some of these value stocks start to rise on the expectation that guidance beats are in the pipeline.
Meaning a company’s earnings or revenue is better than what they said it could be.
This would potentially happen in concert with a successful vaccine rollout.
Just imagine the enthusiasm that would pour into markets in this scenario!
Confirmation by way of good earnings would be the icing on the cake.
Putting it all together
E-commerce players like Kogan.com Ltd [ASX:KGN] and Redbubble Ltd [ASX:RBL] may be due for a sharp reversal in this environment.
As one analyst was quoted in the Australian Financial Review:
‘The contrast between the e-commerce darlings and bricks and mortar retail property is interesting…Internet retail will continue to thrive, but the manic valuation of some pure play e-commerce retailers is capitalising on a level of penetration and consumer behaviour that isn’t realistic in a post-vaccine world.’
More importantly though, what happens to small-caps as a whole?
Here, I think the most important thing to realise is that if you have done your own research (DYOR), then there is no reason to fret immediately.
A value shift doesn’t necessarily mean that small-caps will suddenly fall flat.
It also means that now more than ever, you need to have a good grasp of small-cap financials and also at a really base level — the attractiveness of their products.
Ask yourself — is it a good idea?
When is the next capital raise due to happen?
What partnerships are in place?
The key is just to be extremely selective.
This means looking at potential risks, and also focus on latching onto megatrends that others aren’t seeing at the moment.
Whether this means a potential commodities mega-boom or the rising prominence of technology-driven solutions in the healthcare space — there is plenty to choose from still.
For Money Morning
PS: Four Well-Positioned Small-Cap Stocks — These innovative Aussie companies are well placed to capitalise on post-lockdown megatrends. Click here to learn more.