Low interest rate environment indeed has fascinating influence to bring about many phenomenons: one striking example is the further divergence of two most important schools of finance: Value versus Growth Investing.
Maybe you also notice; there is a growing evidence that folks are more often getting into heated argument online, "which investment strategy is actually better?" (I found investors like to have a virtual brawl on Whatsapp Group and Clubhouse, for instance).
The value crowds usually points on how the market exuberance over expensive stocks will form a bubble. They are frantic on lost-making stocks trading over $4 bn market cap (some referring to BUKA's IPO, and exhaustively quoting finance movies e.g. Margin Call that investors "will run through small exit door when the music stops"). For Value investors, this stock market bonanza should come to an end, eventually.
For Growth stock investors, this 'eventually' might never come! Then they mock the Value camps for being a doomsayer, and points how Values are underperforming the market since, "well, almost forever" — (highlighting that even their heroes like Warren Buffet is piling up Amazon).
It is a fight we've seen over and over again; and just like getting an ice cream from Turkish man, no one is really getting to the point here. Mr Market love making an exercise out of this debate. Though, for us, it doesn't matter what method you are using. At the end of the day, it's all about profit and creating wealth, isn't?
I always love what Mr Wuddy Warsono passed on when he joined Clubhouse session of "Investor Bahagia — he made a comment that investing style can be whatever. He'd like to call that investor should instead adopt a Mix Martial Art kind of investment. "You adjust your tactics based on what kind of environment you are facing — you want striking, grappling, ground fight, anything... When your opponents go high, you go low. There is no one style fits all." Hard to disagree.
Though, we reckon, buying expensive stocks might not be for everyone, yet. Not all investors have the mentality to grasp it. For Indonesia, growth stocks/ high valuation stock might be relatively new. Unlike outside of our borders, though, market has already embrace with expensive deals. It even roots deep into corporate decision making!
Wall Street, for instance, witnessed the highest volume of M&A this year in more than two decades. As cash/ asset ratios are recovering nearly record high post pandemic slump, those cash are now deployed on binge of M&As.
Forget stock investors; If corporate are also adopting "growth stocks" mentality, we might be already embedded into this risk taking mood. YTD there was about a $1.9 trillion worth of deals in the US, the highest volume since at least 2000.
Not only that we see nosebleed valuations on those deals — on the latest headlines, we noted how acquirers are paying up bid price of 32% premium vs the last two decades average — and the amount of deals that worth $100 million or more is about 44% of total. That demonstrate just how hungry buyers are in the IB divisions.
Obviously, SPAC are an important part in the story. 2021 has seen more than $100 billion in equity capital raised from almost 340 SPAC IPOs. Goldman says SPAC could further drive $800 billion worth of M&A value in the next two years!
Although these are really expensive M&A trend, indeed, record low borrowing costs leave more options for companies to fund prospect through debt-funded cash acquisitions. You can partly thank the Fed for that.
The trend of M&A and 'growth stock mentality' (which i'd like to call it) has been buoyant so far, and Indonesian market is no exception. In 2020 alone, we have seen 40 cross border M&As, comprising 32 inbound transaction (and 8 outbound). That proves how majority of deals funding are tilted towards foreign 'cheap' money.
It is notable that, although 2019 seen more activity (there were 94% M&As, almost double 2020), the total deal values jumped way higher $9.7 bn in 2020 vs. 2019 total of only $7.2 bn. Meaning, we saw how each deal in Indonesia increase significantly in value!
We also thank the Omnibus Law for introducing high-level changes to investment framework in Indonesia that have an impact to deal flow, such as alternation of 'existing negative list', even to add a 'positive list' concept as stipulated under Presidential Regulation No. 44 of 2016. This will help market to get full picture of the Omnibus Law impact on M&A transaction.
Dealmaking is a big boon for Wall Street. The word "bonanza" was bandied about. But I think, with how friendly Indonesia is about growth investing, we will also follow its track by the next two years, while the tech/growth businesses are lining up.
On the street level, we are hearing the Growth investing thoughts start mushrooming among retail investors. The camps are getting bigger. More and more followers joining the camps that "buying the top is the new wiser."
Cheers!
Boris, the Stock Broker 🐾
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