The market may be at an inflection point where higher long-term inflation means many of the stocks which have performed best over the past decade begin to persistently underperform, according to Will Hobbs, chief investment officer at Barclays Wealth.
Over the past month, Amazon shares have fallen 7 per cent, and Alphabet, parent company of Google, has seen its share price fall by 4 per cent.
Hobbs says that if inflation continues to lead to higher bond yields and interest rates - due to the fact that the market believes inflation will be higher - this will affect the attractiveness of technology companies, and of US equities more broadly.
This is because many of the technology stocks pay little or nothing in the way of dividends. In a world where returns on cash and bonds are very low, investors are often more willing to sacrifice dividend income, in exchange for future growth.
But if interest rates rise, and the dividends from technology stocks do not, then investors are being asked to make a greater sacrifice by owning technology stocks, which will make a return in future, instead of income-paying assets, which pay a yield now.
The technology and similar equities which will generate most of their returns in the distant future are often referred to as “long duration assets.”
Hobbs said: “I can see how higher rates change how the market looks at long duration assets, and I can see how this could be an inflection point, but I would caution that investment styles are not that return-predictable. I would say now is not a good time to have a strong view, but the valuation gap between the long-duration assets and the rest is very stretched.”
He said the great uncertainty facing clients is that for inflation to remain persistently high, and have the consequent impact on inflation and bond yields, unemployment would have to be low.
Hobbs says at present it is difficult to know the true state of the labour market with the various furlough schemes, and hard to separate out the pandemic impact from everything else that is happening, and this means the picture is less clear than might otherwise be the case.
But he feels that if the market does change, “one cannot go into it with just exposure to the US, despite how that market has done for much of the past decade.”
david.thorpe@ft.com
