Samir Mehta: It’s time to reassess portfolio risk settings

Fading government stimulus is placing global stock markets at a turning point and investors should reassess risk, says Pendal’s Samir Mehta

FADING fiscal stimulus and the dwindling effect of central banks bond purchases is placing global stock markets in a precarious position — which means it’s time to reassess portfolio risk settings, says Pendal’s Samir Mehta.

Mehta, who manages Pendal Asian Share Fund, says the fact that central bank bond purchases are being held at absolute dollar levels means they are not keeping pace with growing money supply in the economy.

That’s ahead of any formal tapering of stimulus and comes while business and consumers are also facing headwinds from supply constraints and rising prices.

It’s time for a change in investor mindset from the strong growth of 2020 to consider a period where stockmarket returns may be more subdued and risks are increasing, says Mehta.

“Policy has now become restrictive, even though it is loose relative to 2020,” he says. “What you want to do now is to reassess the risk.

“If you find you have too much weighting in an asset class that has done exceedingly well — and I’m pointing to developed markets like the US and particularly the technology names — you should be thinking of rebalancing.”

Take a big-picture view

Mehta says investors should take a big picture view of what’s been driving markets over the past two years to understand where they might go next.

“Even though I focus on picking the right stocks with a bottom-up approach to portfolios, at times like this you need to sit back and revaluate overall risks.” 

For much of 2020, stock markets roared as governments allowed deficits to run to combat the pandemic and central banks reduced interest rates to zero or below.

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Stimulus droves household disposable incomes higher. Coupled with debt relief from lower interest rates, rental stays and mortgage relief, spending boomed.

Business bottom lines also benefited from the pandemic. Discretionary costs such as travel were slashed. Many took the opportunity to get structural costs under control and commodity price falls lowered input costs.

“Profit margins for the corporate sector went up — profit growth was staggering,” says Mehta. “That was 2020.”

Now the world looks different.

Three truths that drive markets

“There are three universal truths that drive markets,” says Mehta.

“One is earnings progression — are earnings going up or down? Two is valuation — is that asset you want to buy cheap or fair value or expensive?

“And third — is there enough liquidity to support that asset?”

On those three measures, global investing is looking risky, says Mehta.

“Last year you had disinflation or deflation — this year you have inflation, which is a creeping tax on consumers.

“But from a corporate perspective, it’s also a problem as energy and commodity prices rise, which is increasing raw material prices.

“So even though demand may be strong, supply may be constrained.”

The change is akin to a shift away from the winners of last year in favour of the companies that did it tough during the pandemic, he says.

“It is rearranging the deckchairs of corporate profitability across the world — profits are moving from companies that made lots last year to those that were starved of it.

“So the logistics companies and the container-shipping companies are now making money hand over fist.

“Similarly, commodities — last year they were a loser, this year are a winner.

“When I put all of this together, we are at a juncture in markets where it’s now likely that even though demand conditions are good, even though consumer balance sheets are good, even though income levels are good, there are pockets of resistance on the horizon.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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