Stocks such as Afterpay and Kogan are becoming the ‘poster children’ for excess in markets as they have seen rising market caps yet have little to no earnings.
In a 2021 outlook, Martin Conlon, head of Australian equities at Schroders, said he was concerned how quickly firms were growing their market cap when they had little earnings to back this growth up.
Shares in Afterpay and Kogan rose by 303% and 155% respectively during 2020 compared to returns of 1.4% by the ASX 200 over the same period and were among the best-performing stocks of last year.
While there were strong gains for other established companies such as miner Fortescue Metals, there was a definite trend of companies growing in advance of revenues.
“There is absolute domination of companies with little to no earnings. The vast majority of companies have a huge market cap in advance of revenue and profit, which is a form of momentum investing,” Conlon said.
“You need to be aware these stocks are poster children, Afterpay is bigger than Telstra now and that is symptomatic of an excess in markets and speculative activity which focuses on non-earning stocks.”
Retail stocks
Conlon also highlighted the dominance of retail stocks during the pandemic, describing how they were ‘shooting the lights out’ last year.
This included retail stocks such as JB Hi-Fi, which rose 34%, and Premier Investments, which owned stores such as Portmans and Peter Alexander, and rose by 27% during 2020.
The key reason for this, Conlon said, was government stimulus measures during the COVID-19 pandemic which were putting money into people’s hands and encouraging consumers to spend.
He said: “Money supply is coming from the Government and handing that to the consumer and trying to encourage them to keep spending. That has been very successful and is having a very powerful impact on the economy. We are finding that people are willing to spend when money is put in their hands, particularly if they haven’t benefitted from the asset price gains of the last few years.
“Whether the economy is sustainable is a question mark but it is a very interesting period.”
