Growth stocks have outperformed most other asset classes for more than a decade, yet David Rosenberg still favors them for one reason—growth is scarce.
The proprietor of Toronto-based Rosenberg Research shared his views with other independent research executives last week during DoubleLine Capital’s second annual roundtable. Other panelists included Danielle DiMartino Booth of Quill Intelligence, Ed Hyman of Evercore ISI, Jim Bianco of Bianco Research and Jeffrey Gundlach, CEO and CIO of DoubleLine. The panel, dubbed “Best Ideas,” was moderated by DoubleLine deputy CIO Jeffrey Sherman.
Rosenberg outlined four major themes, all of which revolved around the concepts of scarcity and value. “I’m not bullish on the economy,” he declared.
Though many investors believe the huge central bank money-printing machines around the world will lead to higher inflation, Rosenberg isn’t one of them. To get inflation, “we’ll need four years of 4% GDP growth.”
That isn’t happening. When the pandemic is over there may be a sudden growth spurt. But then Rosenberg says “we’ll revert to normal. Remember what normal was.” The last economic expansion was the slowest of the post-World War II era.
Against that backdrop, he reasons that investors will remain willing to pay a premium for companies that can sustain growth. In a world with $18 trillion in debt selling at negative interest rates, yield is another scarce financial asset.
That’s why Rosenberg likes dividend-paying stocks, particularly those that can growth their dividends. He cited Gundlach’s observation yield might be easier to find in equities than in bonds.
Rosenberg noted that a number of “dividend aristocrats,” companies with long, extended records of raising their dividends annually, have underperformed noticeably in the last year.
In the value sector of the market, he prefers banks and telecom concerns over energy companies. In particular, he likes U.S. banks because they are so “well diversified.” Telecom companies also produce reliable cash flow streams in a world where yield is scarce.
Given his view that inflation is improbable, Rosenberg continues to like high-quality, long-duration bonds. His fourth and final investment theme was Chinese and other southeast Asian emerging markets. Those nations are putting up some of the fastest GDP growth numbers in the world. Price-to-earnings multiples for some companies are close to their growth rates, a condition that doesn’t exist in many other markets.
Bianco Bashes Bank Stocks
Many value investors like banks, but Jim Bianco isn’t one of them. “If banks are a bunch of taxis, then Uber is coming right at them,” Bianco predicts.
The bank index was down 13% last year and he maintained the punishment the market meted out was well-earned. In his view, they are becoming a stodgy industry vulnerable to disruption and he compared them to utilities.
Among the companies that will eat banks’ lunch, Bianco cites Marketaxess, a fintech and data analytics company that was up 75% last year, and Tradeweb, a Treasury bond trading platform that climbed 35% in 2020.
Two other financial companies Bianco believes are poised to continue their brisk growth at banks' expense are MSCI, up 75% last year, and S&P Global, up 28%, good enough to best the S&P 500. Both companies are well-positioned to capitalize and both the indexing and ESG booms.
Post-Pandemic Consolidation
Danielle DiMartino Booth thinks both the energy and financial sectors will experience a wave of mergers and acquisitions in 2021. Earlier today, the Wall Street Journal reported that two giants, Exxon Mobil and Chevron, discussed a possible merger last year.
That indicates what kind of conversations are going on at the highest levels in the energy industry. “Consolidation in the energy industry is going to be a huge story this year absent a huge spike in energy prices,” she said. “There is enough risk insolvency” in that business that “the majors are going to pick off smaller players at cheaper prices than in 2015.”
Regarding banks, Booth was more constructive than Bianco. “Small- and medium-sized banks have lots of commercial real estate loans and that hasn’t been priced in yet,” she argues. “But it will lead to major consolidation among financials.”
Booth also spoke highly China and Japan as regions to invest in. Controversial telecom giant Huawei owns just over 30% of all the world’s telecom equipment. “If they get to 50%, just back up the truck,” she predicted.
She also questioned implicitly the Trump administration trade strategy with China. “The U.S. has been focused on soybeans and China has been focused on semiconductors and the next generation of technology.”
While the Japanese equity market is expensive now, Booth would look to buy if it corrects. She noted that Japanese companies have discovered high-quality corporate governance and cleaned up their balance sheets. Companies are “much less susceptible to corruption,” she said.
Gundlach Says Maintain Diversification
For his part, Gundlach believes we are in a very different world than the highly financial market regime that existed back in 2017 and 2018. In his view, we were in a place of “unnatural stability.”
One development he expects is an increase in the volatility of inflation. Since 1995, the U.S. hasn’t experienced a single year of 3% inflation.
While he acknowledges there remains “high deflation risk,” he was by no means certain about it. After all this global central bank debt has been created in the last decade, the policy response could be to “engineer inflation” in a similar fashion to what former Fed chairman Paul Volcker did with disinflation.
That’s why Gundlach says investors need to be “extremely diversified.” He continues to recommend a portfolio consisting of 25% long-term Treasury bonds as a hedge against deflation, 25% Bitcoin, real estate or gold as a hedge against inflation, 25% cash and 25% equities. Among equities, he favors Asian stocks and emerging markets based on valuations and his conviction that the U.S. dollar will continue to weaken.
In 2021, that strategy served investors "pretty well," he observes. And with so much uncertainty in the markets and global economy, he thinks it could continue to do so for the next three or four years.
Hyman of Evercore ISI believes that if inflation materializes, "we'll see it coming" and the Fed will "stay on hold" for at least six months. In the early phases of of inflation, everyone takes credit for price increases. Workers think they deserve their generous raises, while companies assume they have finally perfected their products. Eventually, it dawns on market participants that they are being rewarded for things besides their own skills and talents.
As for investments, Hyman agrees about diversification but has other alternatives on how to achieve it. He likes tech stocks, real estate and cash.