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March 9, 2021
As long-term investors, we typically avoid making short-term market observations. However, after a blistering run upward, the technology stocks with little but revenues and aggressive growth predictions have fallen back to earth. We believe a chain reaction is occurring in what have been “consensus long” positions in this very crowded area of global markets. Selling leads to passive rebalancing (and, more selling), triggers margin calls, and encourages short positions.
From market close on February 12, 2021—NASDAQ’s 2021 peak—to yesterday’s close, a representative Causeway Global Value Equity portfolio outperformed the MSCI ACWI Index by 964 basis points, net of fees*. The portfolio’s information technology and communication services stocks contributed nearly 40% of that total outperformance.
In this period from mid-February, as bond yield globally have risen, the high-growth software and Internet stocks that analysts viewed thematically as Covid-19 winners, as well as semiconductor stocks whose valuations reached all-time-highs in anticipation of a strong cyclical upturn, have largely suffered the greatest downward pressure. With bond yields falling, valuation seemed like a quaint concept. Yet, we believe that signs of an economic recovery have made valuation paramount. Rising bond yields undermine long-duration equities—those valued on lofty price-to-sales multiples—promising to deliver cash flows at some hazy point in the future.
Rising bond yields undermine long-duration equities—those valued on lofty price-to-sales multiples—promising to deliver cash flows at some hazy point in the future.
The Causeway Global Value Equity portfolio has emphasized companies that have historically (pre-pandemic) generated abundant free cash flows versus their peers and that, in our view, have the potential to resume this pattern as recovery accelerates. We believe that our portfolio companies are well-managed, have resilient balance sheets and are well-positioned for economic recovery.
The fundamental analysis from our Technology and Communication Services research cluster has led us to emphasize the following areas:
Software: Infrastructure software companies with large, high-retention customer bases transitioning to cloud computing versus pure-play cloud stocks that have already been benefiting from Covid-19. We also have identified attractively valued travel-related software companies whose revenue declined 50-70% on a year-over-year basis in 2020 due to Covid-19 but that, in our view, are poised for a strong recovery in 2021-2023.
FinTech: An established fintech company diversified across multiple business segments over newer, pure-play upstarts
IT Services: Under-the radar companies with economically defensive recurring revenue and a rapidly growing mix of digital transformation contracts versus digital transformation pure-plays
Semiconductors: Memory companies, which we believe will be more valuable in a data-centric economy, and companies with strong business “franchises” and order visibility versus secular thematic growth stocks in data centers and artificial intelligence.
Through diligent fundamental analysis rooted in primary research, we believe we have exposed client portfolios to attractively valued technology stocks. As valuation reasserts its importance in the technology sector, we expect a meaningful rerating in this segment of Causeway global value equity portfolios.
*Past performance is not an indication of future results. Historical performance of Causeway’s Global Value Equity Composite appears below.