The promise of a vaccine sees value stocks turn a corner

The promise of a vaccine sees value stocks turn a corner

When equity markets rallied 8 percent on the announcement of BioNtech and Pfizer’s Covid-19 vaccine, it showed just how eager investors were for some light at the end of the tunnel. But as global lockdowns persist, it’s clear we’re not out of the woods yet, and markets pulled back again to reflect that. What we did see, though, was a change in sentiment towards so-called value stocks, which has interesting implications for investors.

Is the tide turning for value stocks?

Over recent months, the gulf has widened between the performance of growth stocks (companies with good cash flow and earnings that were largely insulated from the effects of Covid-19) and value stocks (companies with cyclical businesses, more dependent on a strong economy, which remain cheap relative to the rest of the market). As the graph below shows, growth stocks have more than recovered their losses from the crash in March while value stocks still languish below pre-Covid levels.

But news of a vaccine seemed to stem this trend. In November, we saw value stocks rise six percent more than growth stocks. As the clouds start to dissipate over the future economic landscape, this looks set to continue. At the same time, growth stocks could fall out of favour as investors realise the profits they have made and reinvest elsewhere. What we could see is a convergence of the fortunes of these two investment approaches. There is still a huge amount of uncertainty, but carefully seeking the right opportunities in value stocks now could improve future returns, and this will play an important part in our tactical decision-making over the next few weeks.

“Equities remain expensive but still have good long-term return potential. Careful stock selection is key as a low-growth environment produces few winners. We will continue to look for opportunities while maintaining a focus on resilient, well-capitalised businesses.”

Philip Smeaton Chief Investment Officer
Philip Smeaton, Chief Investment Officer

A market-friendly result in the US

Another important turning point for investors was the US election result and the impact of a Democratic president without a majority in the Senate. In the main, this result has pleased investors. Here’s why:

Outlook

The Democrats do not have the majority necessary in the Senate to implement their tax-policy changes.

Implication for markets

The continuation of lower taxes means more capital to reinvest and/or distribute to investors.

Outlook

The Democrats do not have the majority necessary in the Senate to implement their tax-policy changes.

Implication for markets

Without support of the Senate, Biden will be unable to increase state control of the healthcare system.

Outlook

Democrats will face Republican objections to further regulation of the US tech industry.

Implication for markets

Less red tape means fewer regulatory obstacles for tech firms to spend money.

Outlook

Without the incendiary force of Trump, relations with China and Europe could improve.

Implication for markets

This will benefit multinational companies in the US, China and Europe.

Outlook

The long-anticipated US stimulus bill is likely to pass with bipartisan agreement.

Implication for markets

Along with monetary support, fiscal policy has buoyed markets for months and will continue to do so.

Investment View: why investing for the long term is key

While some people might manage to time the market to perfection and then dine out on their fortune for years to come, most of us simply aren’t that lucky. But investing should not be about luck. As professional investors, we are always hammering home the importance of taking a longer-term approach. Here we explain why.

When we make investment decisions, we take a view on the risks and opportunities that exist over the next few years and the returns we might achieve, all things considered. At times, such as amid the market crash back in March, the longer-term outlook for returns is high since the price of stocks is relatively low. At other times, such as now, when valuations are high, the outlook for returns is more muted.

The question is: when expected returns are low, should we sit tight and wait for better opportunities to present themselves?

The longer you invest, the less your entry point matters

That all depends on how long you intend to invest for. In the chart below, the light-blue line shows the return you would have achieved on the S&P 500 had you invested for one year at a given point in time. As you can see, the volatility is unmanageable. Yes – you might have been lucky and made a 70 percent return, but if you had invested just a week later, you might have made a 50 percent loss. Investing with such a short time horizon is simply too risky.

On the other hand, the darker blue line shows the average annual return you would have achieved if you had invested for 15 years at a given point in time. Since the early 1930s, you would have consistently achieved a positive average annual return over 15 years, despite the various recessions and stock market crashes along the way.

Never try to time the market

Clearly, there were good years to invest and years that were not so good, but in general, historical long-term equity returns have been positive. Which is why we will never encourage clients to invest their money for the short term or wait for a specific moment in time that may or may not come. The earlier you start investing for the future the better – and then you can let the experts take advantage of any investment opportunities that arise along the way.

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