Beware ‘Distortion Complacency’ in Equities, T. Rowe Says

The COVID-19 pandemic over the past 20 months has benefited many technology and ‘stay at home’ stocks, and a low cost of money has fueled speculation to prop that up. But that dynamic is poised to gradually unwind as the world normalizes.

That’s the view of David Eiswert, Portfolio Manager, Global Focused Growth Equity Strategy at T. Rowe Price.

Speaking at the firm’s 2022 Global Market Outlook Press Briefing on Nov. 16, Eiswert said investors need to beware complacency and not assume that the market distortions of 2020-2021 will continue indefinitely. 

“We think that COVID has accelerated fundamental change and innovation in the world,” Eiswert said in his presentation, titled ‘The long road back to the future’. “At the same time, we are headed back to more normal relationships. There’s a certain amount of complacency in how we’re operating, as people and as investors.”

Eiswert cited three key global distortions: COVID behaviors such as working from home, which have manifested themselves in supply chain problems, elevated prices for used cars, and other constraints; historically loose monetary and fiscal policy; and China reform and policy change.

Eiswert posited that inflation is likely near its peak, and will subside as supply chains regain efficiency. Regarding digital transformation and other COVID-accelerated technologies, he said it’s critical to differentiate “chasm crossers” who have gained scale and tipped markets, with imposter firms who are mostly benefitting from short-term behavior.     

“COVID behavior is likely to moderate in coming years,” Eiswet said. “Being able to parse through the difficulties will be critical. It’s important as an investor to think about how the environment will change…In a more normal world, how do I position as an investor?”

Very accommodative monetary and fiscal policy have fueled distortions, reduced or eliminated price discovery in some securities, and compounded the ‘wealth effect’. “Barriers to entry to speculation have never been lower,” Eiswert said.

China presents interesting investment opportunities, as by taking advantage of flush global liquidity to address real estate problems, “in some sense China is fixing the roof while the sun is shining,” Eiswert said. “It’s an attractive place to invest relative to the distortions we are seeing.”

In summarizing, Eiswert noted that the pandemic will have a lasting effect, “but as COVID moderates, some extremes we have seen will look more normal. That’s dangerous for investors who are complacent.”

The portfolio manager recommended being “carefully contrarian” against the ongoing market distortions. “Barriers to speculation have gone down and money has flowed into that speculation, but we expect that speculation to be much harder in ‘22 and ‘23.”