25Aug 2020

Asset Class Review

by Michael Armitage

This article is co-authored by Tim Johnston, Managing Director of Apollo Capital and Michael Armitage, Principal of Fundlab

Markets are fascinating. The current macroeconomic backdrop is especially interesting. Not only are we in the middle of a decades-long global money printing experiment, we are in the middle of a severe global pandemic that threatens the lives of hundreds of millions of people. Many global economies are in recessions. And yet as investors, we continually ask ourselves, where to from here?

At Apollo Capital we have the privilege of speaking to a wide variety of investors, from high net worth individuals, to family offices and small institutional investors. At times it appears no one is bullish on any asset class. Below, we consider the outlook for the traditional asset classes: equities, bonds and real estate. Australian investors will need to work harder and smarter than they have previously. The time for simply being levered long real estate and long equities has passed.

Please note, the below is not investment advice. The consideration of these asset classes is simply a high level description of how we view the current state of traditional assets. Please do your own research, form your own conclusions and by all means, let us know if your view differs.


We believe an outlook on equities involves reconciling two competing forces: valuations and global money printing.

First, valuations. From the investors we speak to, it is hard to come to any conclusion other than valuations of equity markets are stretched. That’s putting it diplomatically. Some valuations are ludicrous. The chart below is the historical Price Earnings (PE) Ratio for the Australian All Ords Index. We can see that the market’s PE ratio did not even revert to its long term average when markets were first impacted by Covid-19 in March. As markets have recovered, so has the average PE ratio, trending back to elevated levels.

All Ords PE Ratio.png

The current PE Ratio for the S&P 500 is around 28 and is significantly higher than average. The valuations of many tech stocks are astronomical.

Shopify is one example of the extreme valuations placed on leading technology companies. Shopify recently announced second quarter financial performance. Total revenue for the second quarter was $714.3m, GMV was $30.1 billion and operating income was $300,000. Annualised, those numbers are revenue $2.8bn, GMV around $120bn and operating income $1.2m. Shopify as a whole is valued at around $116bn, meaning Price to GMV is around 1, Price to Revenue is around 41 and the Price to Earnings is around 1,160. These are incredible numbers! Investors are clearly pricing in a huge amount of growth.

While it may not be fair to analyse one stock in isolation, tech stocks are increasingly leading global equity markets. Perhaps this time is different – valuations of companies, especially technology companies have been high for a long time, and investors have generated strong returns investing into already expensive technology stocks. Then again, if you’ve read the book, this time is never different.

An investor would be brave to bet against equities, both global and domestic. We believe equities are largely being propped up by the flood of liquidity from global central banks. This new paradigm has been the case for a number of years, equities have been expensive for a long time now, yet they have continued to become more expensive, culminating in one of the longest bull markets in history.


We believe the outlook for bonds and fixed interest is negative. Bonds appreciate in periods of falling interest rates. Interest rates have been falling for a very long time and are arguably at ground zero. Some longer dated government bonds are trading at negative rates, meaning investors are not receiving any interest. Rather, they are paying to receive the notional amount in the future. These investors are of the view that rates will decrease further into negative territory.

Source: Blomberg Barclays Global Aggregate Negative Yielding Debt Index, as of June 2020

Source: Blomberg Barclays Global Aggregate Negative Yielding Debt Index, as of June 2020

Real Estate

We are bearish on commercial real estate and neutral on residential real estate. We predict commercial property will suffer from a decades-long shift from centralised working in CBDs to flexible remote working conditions. We were already seeing the start of this trend which has been dramatically accelerated as Covid-19 has impacted our lives. The surveys are clear – workers prefer to work from home. Assuming your average worker would prefer to work from home 2 to 3 days a week, we question whether that will lead to a 40-60% reduction in demand for commercial real estate. It might not be that simple, a worker might still need a space, even if they are not using it, but we believe the writing is on the wall for commercial real estate.

Australian investors have amassed vast amounts of wealth from being levered long residential real estate over the past 30 years. Australian investors love property, but we think the love story is coming to an end due to the bottoming out of interest rates. Australian property investors have benefitted from falling interest rates for nearly 30 years. While property has seemed expensive for a very long time, the ability to service mortgage repayments has eased dramatically. While it can be difficult to buy into the market, once investors have bought in, interest rates have fallen, investors find it easier to pay off their mortgage, their house inevitably appreciates, they believe property is a high return, low risk investment and they rinse and repeat. This cannot go on forever. Australian property may benefit as mortgage interest rates decline to reach the same levels as our global mortgage rates (around 1-2%). However, residential real estate investors would be brave to expect the same returns over the next 30 years as we have seen over the previous 30 years.

Opportunity Cost

With a bleak outlook for traditional asset classes, investors must consider where to from here? Some will increase their allocations to defensive assets like cash and government bonds. Many have and will increase demand for alternative assets like gold and crypto assets. We ask investors – what is the opportunity cost of allocating to crypto assets? What are investors foregoing by shaving one or two points from traditional assets in favour of crypto assets? We believe the opportunity cost is low. In return, investors gain exposure to an area showing promising growth that is uncorrelated to traditional assets.

The main reason investors would shun crypto assets is risk. Crypto assets are volatile, the technology is young and there is a not insignificant risk of permanent loss of capital. Let’s flip the question around – what are the risks in traditional assets? With stretched valuations in equity markets, a bleak macroeconomic outlook and global interest rates at ground zero, perhaps investors are underestimating the risks in equities, bonds and real estate. When analysing the risk of traditional assets, the low opportunity cost of investing in crypto assets, their uncorrelated nature and enormous growth potential, the prospects of crypto assets looks increasingly favourable. The question then becomes which investors are prepared to work harder, do the research and take on the reputation and professional risk associated with suggesting such an allocation.

Michael Armitage

Michael is a strategic advisor at Apollo Crypto. His career consists of twenty years in the global capital markets (hedge fund) portfolio management (volatility focused) and ten years in managed fund research. He also has over eight years of institutional investment strategy consulting (risk overlay, retirement product development and liquid alternatives). He is a keen crypto enthusiast and has been investing in the space since 2017.