Please find below our interim Investment Market Update as at 11th June 2021.
Blue Sky Investment Market Update
What happens when they come off the oxygen?
I’ve mentioned quite a few times, from an investment point of view, the rotation away from sectors which did well last year. Whilst we have moved some assets into the so-called ‘value stocks’, we are not committing en masse to sectors like retail, hospitality, airlines, travel companies etc.
It appears to us that there is too much unpredictability and raises the question as to whether this rally can continue. It must be borne in mind that governments have heavily supported many of these companies and we don’t know what will happen when they come off the oxygen.
I know I’m repeating myself but this, along with rising inflationary fears, are the key drivers affecting investment markets at the moment.
As I have covered much of this ground previously, I thought this week I would just summarise LGT Vestra’s position on the latest sentiment around markets. You will no doubt be pleased that this means a shorter communication!
LGT Vestra last week sent us an update on their views around the debate of value v growth. They suggested that this debate across investment circles is about as polarising as politics.
Those proponents of value have been shouting louder in the last six months than for a very long time. Rising inflation, along with economies in the developed world opening faster than was anticipated due to the vaccination rollouts, have contributed to the rotation away from value towards growth stocks. The fear of Central Banks tapering asset purchases (quantitative easing) and the prospect of rate hikes have also played their part.
LGT Vestra have called it a ‘dash for the trash’. Very catchy. With expectations so high, growth companies have been finding it difficult to continue their stock market dominance, despite stronger results.
They provided some snapshot figures of how well the big five tech companies have performed within their businesses, but it appears they are no longer the darlings of the stock markets.
Big Tech Q1 2021 results paint a picture of astounding growth:
- Amazon grew revenue in Q1 at +44% year-on-year (YoY)
- Apple reported their best Q1 revenue ever of $90bn, up +54% YoY
- Alphabet saw a +34% YoY increase in Q1 revenue
They go on to state that according to a recent update from Strategas, the tech sector is at a relatively low point versus the S&P 500 for the first time in over a decade. Why is this the case? Some of these companies will continue to dominate their industries for decades to come. Who’d have thought we’d have been having this discussion towards the tail end of last year?
Whilst no one has a crystal ball, LGT Vestra reinforce that they have a team with a vast experience in investing for the long-term; riding different waves of uncertainty and volatility over 10+ years and coming out the other side with impressive risk/return figures versus their peers.
In simple terms, LGT Vestra state that they are not going to chase this market, especially considering value stocks typically find themselves in this ‘value bucket’ due to poor fundamentals or structural headwinds in their industry.
The ‘dash for trash’ is essentially a short-term play, but they don’t focus on simply the next few weeks or months. Many investors are getting excited about this short-term earnings growth, the retail industry being a case in point, but are shortsighted to the longer-term secular declines.
Earnings growth will ultimately be the prevailing factor in whether an investment succeeds. In the short-term, markets act like a voting machine (popularity) but in the long run, they act like a weighing machine (fundamentals).
Of course, there are some quality businesses in the value bucket and plenty of these are held across the LGT Vestra model portfolios. However, LGT Vestra’s focus is on the fundamentals of companies, in the form of revenue and earnings growth, rather than jumping headfirst into the reflationary/re-opening trade.
They, of course, don’t know how long this rally will last but raise the possibility that the winners of the last six months can be stung just as easily if events take a turn for the worse.
The key beyond the immediacy is owning quality businesses with pricing power, which are well positioned to benefit from long-term structural growth. They have been favouring smaller companies, which should outperform their larger cap counterparts as activities and domestic consumers return. We strongly agree with this sentiment reinforced by our 40% holding in small cap stocks (UK and US) via our Momentum portfolio.
Interestingly, over the last month we have seen an about turn as many growth stocks, including technology, have outperformed the broader markets.
Have a great weekend and enjoy the rays.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.