Investors are spending a lot of time worrying about the impact higher inflation might have on their bond and equity portfolios but fund manager Hari Balkrishna says their focus should be on longer-term deflationary forces that will drive markets over the next five years.
Balkrishna is a global equity associate portfolio manager at T Rowe Price and he was in Sydney last week to speak to investors.
“If there is going to be a paradigm shift in markets over the next three to five years it will be inflation,” he says.
“We think there are a number of things leading to structurally lower inflation. They include ongoing technology developments, globalisation and demographics.
“We see faster and faster take-up of technology and we still have artificial intelligence and quantum computing on the horizon.
“In terms of demographics, the slowing of the global population growth rate is disinflationary.”
Balkrishna can see that with the current state of synchronised global economic growth and higher corporate earnings, inflation is a concern for the year ahead. But T Rowe Price’s view is that the increase will be modest, with little chance of a breakout. The real inflation story is longer term
“We are looking for stocks that are on the right side of the disinflationary change we see over the next few years,” he says.
His global equity portfolio includes the Japanese robot maker Fanuc Corp, the e-commerce portals Shopify, Amazon and Alibaba, and car maker Tesla.
“By 2023, 10 per cent of all new cars will be electric. Tesla has a 10 per cent share of the electric car market. The stock could grow 50 to 100 per cent over the next three to five years,” Balkrishna says.
The portfolio also includes the bioscience company Chr Hansen of Denmark. The company is the world’s leading producer of dairy cultures and probiotics. Balkrishna says the company has a track record of growing revenue by around 10 per cent a year and EPS in the high teens.
Alibaba is a controversial holding. “People say it is not sustainable and there are a lot of short sellers. We don’t agree. It will double over five years.”
On the issue of current market valuations, Balkrishna says US stock forward price-earnings multiples are above their 20-year average – currently 18 times, compared with the average of 16 times.
“Valuations are above the average but they are reasonable. In this market you need to be thoughtful about picking your stocks but you can still pick up alpha.
“US stocks are on 22.5 times free cash flow, which is sustainable. This cycle can go on.”