Source: Monash Investors
Tech stocks generally have the highest growth rates of all the stocks, and while they have been the biggest winners since the pandemic, they have done little since November. So, the first major trend to watch for in the coming financial year is whether the growth stocks start to outperform again.
For what it’s worth, I think they will. It is hard to see an easing off in the changes in technology and consumer preferences that have been benefiting the growth businesses, and ultimately the growth in their earnings per share will trump a medium-term de-rating.
The second trend to watch is on inflation and interest rates. Interest rates have generally supported the stock market and asset prices. This has assisted asset-price inflation, but not inflation for the price of goods and services. A lower interest rate also reduces interest expenses for companies and consumers.
It would be a big concern for equity markets if interest rates were to rise significantly. Many commentators are concerned that low rates and quantitative easing [a form of monetary policy by central banks] will “leak” into higher prices, which will require interest rates to rise.
Once inflation expectations set in, they can be hard to diminish, as we found out in the 1970s and 1980s. We have at least seen some short-term pricing pressures in computer chips and building materials.
Historically, increased money supply led to higher inflation; however, inflation appears to have become much less sensitive to monetary policy over time. It’s worth getting back to first principles on inflation to explain this.
Prices for goods and services rise when demand pushes against the envelope of supply. Businesses respond to increased consumer demand by putting up prices if they can get away with it. But it’s hard to get away with it when the customers can search for alternative products easily using smartphones, and modern technology has increased the speed at which competitors can identify demand and ramp up production if they see an opportunity to take share.
So, increased technology and automation have generally kept goods and services inflation low. I don’t foresee a change in this trend in the medium term.
Covid has caused understandable disruptions to global supply chains, which has caused the inflation we now are seeing in the economy. These disruptions will be addressed and inflation will moderate once more.
So, while interest rates will rise as quantitative easing and central-bank suppression ends, I don’t expect inflation will cause interest rates to rise so greatly and rapidly over the medium term that there will be another crash.
In the near term, the Covid winners may lag the losers as economies reopen after vaccine roll-outs, prior to resuming. However, an acceleration of the trends in behaviour due to the pandemic by consumers, business and government has firmly entrenched a cohort of Covid winners and losers for some time to come.