Investors have spent the last few years betting with the Fed and the ECB, as monetary policy dominated fundamentals. But many are now stumped over what to do next, as central bankers today seem to carry more risk and less reward.
The ECB’s Mario Draghi let investors down this month with a flawed communications strategy. The trades went on a beefed up QE package or QE2 and a deeper move into negative territory on deposit rates. The markets got a taste of what they wanted but it was a morsel versus the banquet they were anticipating. This week’s Fed decision could also fall flat. Strong intraday swings on the Dow last week point to skittish sentiment, far from ideal when the market is meant to have priced in the first rate hike in nearly a decade. Investors are already nursing flat to negative returns on equities stateside which allows no room for disappointment. The zero margin for error comes as Janet Yellen has the complicated task of lifting rates while encouraging investors to stay upbeat and managing expectations around further interest rate hikes.
All this suggests that the trade of going long risk assets while Mario and Janet stimulate is no longer going to serve up much in 2016. Enter GARY.
So who is GARY? GARY has been overlooked amid the hype around new technology with huge valuations. Neil Campling, TMT analyst at Aviate Global, explains the new acronym developed by his company. “The GARY principle is growth and reasonable yield. Be selective and don’t invest on a hope cycle but invest in real and tangible companies.” Campling cites UK-based ARM as one business that he would consider worthy of GARY inclusion.
“There are companies that fit the criteria of a reasonable multiple, reasonable yield and a stock that’s trading below its historical multiple,” he says.
Stable yield-loving pension funds agree the principle has merit. “I think as we move into the back end of this bull market, firms that are able to demonstrate the ability to deliver growth and income are going to start to become very highly prized,” says Tom Stevenson, investment director at Fidelity.
He has already questioned the risks of chasing the technology boom. “It’s 1998 all over again with the hope that is being placed on this sector and it’s a function of living in secular stagnation. It feels like we are brewing up another 1999 (technology bust),” he says.
The history lessons abound, with Global Aviate comparing GARY to investing in the 1960s and 70s, when the so-called Nifty Fifty were the 50 large cap growth stocks to own and hold on the New York Stock Exchange. “It’s like a new Nifty Fifty – and the stocks that we have analysed still have a multiple that is half the value of the Nifty Fifty back in the day,” says Campling.
Where does this leave the high growth FANG (Facebook, Netflix, Amazon and Google) and BAT (Baidu, Alibaba and Tencent) companies that have lived on the promise of high growth in a low growth, low return landscape?
“Be selective where you put money to work. There are still some big themes that continue in 2016,” says Campling. “Netflix is overhyped, expensive and easily displaced by Amazon Prime. Facebook is a global platform company and will continue to work next year. Out of the Chinese names, Tencent will be the one that works.”
Investors are desperately in search of a theme for 2016. Maybe GARY has arrived at the right time.
Karen Tso is an anchor on Squawk Box Europe on CNBC. @cnbckaren.
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