“That’s why in the medium term we’re happy to look for companies that have a meaningful change in their earnings profile.”
Mr Sequeira said investors should not ignore the impact of index funds and the popularity of tech index funds as they arguably had skewed the valuations of the most popular tech names higher.
The risk-on trade backed by money printing, cash handouts, record low rates and a falling greenback sand-bagged the strength of some popular growth and tech shares through the final quarter of 2020, but others have remained resilient.
On Tuesday one of the ASX’s largest and oldest technology businesses, REA Group, hit a new record high and Seek closed just shy of hitting its own record high.
Two of the local market’s biggest tech businesses, Afterpay and Xero, which returned 294 per cent and 92 per cent respectively over 2020, also advanced near record highs.
Justin Braitling, chief investment officer at Watermark Funds Management, said investors should “stay long” on traditional internet names Domain, REA Group, Seek and Carsales, as they had proved resilient long-term winners irrespective of pandemics, sector rotations and the macro-environment.
While growth stocks could prove to be strong investments this year, Mr Braitling said the macro-environment and steady recovery from lockdowns meant the reflation trade would likely return to dominate markets.
“Short term I think we’ll see a little bit of a correction, before the underlying reflation trade resumes that being a weaker US dollar, stronger commodities, stronger risk assets, weaker bonds. Those are the four aspects of the reflation trade.”
Watermark Funds Management boss Justin Braitling says the reflation trade could dominate equity markets in 2021. Ben Rushton
On Tuesday the US dollar index, as a measure of the greenback’s strength versus a basket of six other international major currencies, continued its fall towards a three-year low.
Yields on risk-free assets such as cash, adjusted for inflation, also generally remain negative or close to negative. The Bank for International Settlements has previously reported about $US17.7 trillion ($22.9 trillion) in government or corporate bonds offering a negative yield.
“There’s too much stimulus out there still,” said Mr Braitling. “Bond yields are probably 100 basis points below where they should be and you see this ongoing trade out of defensive bond proxies, in particular, into cyclical securities.”
The strength of the reflation trade has been evident in the major miners, who helped drive the market gains through the final quarter of 2020 and have already made a strong start to 2021.
On Tuesday, BHP Group and Rio Tinto added 2.9 per cent and 2.1 per cent respectively, and Fortescue set a new record high of $25.19, all on the back of iron ore soaring 3 per cent to a record $US165.29 a tonne.
Mr Braitling suggested the reflation trade would trump tech as the dominant equity market theme in the year ahead.
“The opportunity is really to take profits in those cyclical sectors that have led, like metals and mining, steel, media, building materials these cyclical sectors that have performed well and rotate into those cyclical sectors that haven’t performed as well,” he said.
“It’s too early to be rotating out of cyclicals into defensives, out of value back into growth. This trend will continue for another six to 12 months.”

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