Australia Strategy: Global leaders update

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
22 June 2021, 2:30 PM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Activity amongst many of the dominant global consumer franchises is back to pre-pandemic levels, while the leading technology franchises continue to leverage structural shifts in the way consumers work, live and play.
  • Our Asset Allocation Update – Q3 2021 (login to view) details the logic behind our recommended 26% exposure to international equities for Balanced investors.
  • Recent quarterly results again exceeded expectations across the global leaders, supported by economic recoveries unfolding quicker than expected.

International exposure in portfolios

As lockdown restrictions continue to ease in developed markets, we think the cyclical ‘rotation’ in global stock markets has further to run, driven by a strong economic recovery coupled with significant pent-up demand. With governments willing to deploy fiscal policy and central banks prepared to let inflation run for now, we think the reflationary backdrop will continue to favour investment in global equities.

The strengthening AUD will be a headwind for US exposure, so tactically we prefer hedged exposures.

Looking at weakness in AliBaba

Alibaba (0700.HKE, BABA.NYS) is the world’s largest online/mobile commerce company by merchandise value. It operates China’s most used online marketplaces and payment solutions and boasts +700 million buyers, or about half of China’s population. After stunning growth – akin to Amazon’s rise – Alibaba hit an air-pocket in late 2020, to since underperform the NASDAQ by 60%. Investors were/are worried about the failure of the Ant Financial IPO (mooted the largest in history), the disappearance of founder Jack Ma and fears of nationalisation by the Chinese Government.

The consensus of market opinion believes the regulatory issues facing Alibaba are short-term blips. Factset consensus forecasts 35% upside to fair value, with the stock trading on 20x forward earnings versus an average 34x across FAANG peers. The bulls emphasise that the antitrust issues Alibaba faces with the CCP are not unique to the company nor to China, and point to Facebook’s ongoing rise since the 2018 Cambridge Analytica scandal.

The reality is that the mega-cap tech stocks simply cannot avoid increasing regulatory scrutiny. However the speed at which China can enact antitrust pressure risks unsettling investors more than for a western company. Ultimately though, consumer tech giants including Alibaba and Tencent are critical to the transition of the Chinese economy and therefore remain essential, and beneficial businesses worthy of interest at current values.

Exposure to Alibaba suits growth-oriented investors with more Assertive risk profiles.

Figure 1: Alibaba has significantly under-performed versus peers since late 2020

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Iress, Morgans Financial

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We share the full list of 20 stocks with material upcoming catalysts and share our analysts' comments in our full research note.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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