Nov 23, 2021
Co-Head of 4Factor, Rhynhardt Roodt, explains why post-pandemic economic normalisation and earnings growth will be key to sustaining the bull market.
The resilience of global markets in 2021 has been quite remarkable set against the negative newsflow of supply chain issues, rising inflation, the energy crisis in some parts of the world and strains in the Chinese property market. It’s not yet over - yield curves are steepening and monetary stimulus looks set to be replaced by asset tapering, perhaps even interest rate rises in some countries.
The argument in favour of equities rests upon their attractiveness relative to other asset classes. Despite the recent rise in longer-dated bond yields, this remains valid. However, it seems unlikely we will enjoy any further expansion of valuation multiples through a broad rise in market levels. The sustainability of the current bull run will be dependent on companies growing profits into current valuation levels.
Most of the issues I have highlighted are perceived to be rather short-term in nature. The consensus view is that the post-COVID economic normalisation will continue into 2022. This may prove an overly optimistic view but, at the same time, given the lack of investment alternatives, investors will probably still be rewarded by continuing earnings growth, albeit at a somewhat slower rate than that experienced in 2021.
We are focussing on sectors showing strong earnings growth, which we believe will be sustainable into 2022, and areas such as information technology, where we are finding the greatest concentration of attractive structural growth opportunities. We also like industrials, specifically stocks that might benefit from climate transition and the US infrastructure bill.
Financials are an area of global equities offering quite good value and would be beneficiaries of rising interest rates, should this materialise. Elsewhere, some commodity prices are quite high and we are finding fewer opportunities within cyclical sectors, such as materials. Defensive sectors lagged during 2021, as earnings growth has struggled to keep up with the broader market but this gap may close. Healthcare certainly looks more attractive now than at the beginning of 2021.
The key to adding value relative to any global equity benchmark is likely to be stock selection. I believe features like style allocation, sector and regional allocation and whether you are running a higher or lower beta equity portfolio are going to be less important than individual stock selection going forward. We remain focussed on building portfolios that offer a blend of quality, value and momentum in a market that is likely to become a lot more selective in distributing its rewards.
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