LONDON (Reuters) – Today’s $ 72 trillion investor question: To buy or not to buy in global equities? Despite inflated stock prices, politics and the pandemic, the answer of many is a resounding “yes.”
FILE PHOTO: Apple logo displayed in the Apple Store at The Marche Saint Germain in Paris, France July 15, 2020. REUTERS / Gonzalo Fuentes
That’s not just because unusual incentives – $ 20 trillion and counting – force a structural change in how financial assets are valued.
It is also down to years of social shifts, innovation and now, the pandemic, which could forever transform the way people work, study and shop – playing into the dominant hand of tech stocks.
That while recent coronavirus outbreaks and upcoming U.S. elections have made some investors cautious, many stockpiles are hanging in there, after improving the value of equities worldwide by $ 24 trillion since the end of March.
As global equities near record highs, strategists say the quickfire bear-to-bull switch was not only fair, but deserves to go further.
“The COVID pandemic has taken existing trends – greater reliance on tech, online shopping, remote work, etc. – and supercharged them,” said Benjamin Jones, a senior multi-asset strategist at State Street Global Markets.
With technology stocks holding on to their notable gains, investors say the next leg of the rally is likely to come from value stocks – so-called because they trade with cheaper valuations than their growth-oriented peers.
Equities, of course, benefit from above-average premium risk premiums, the return one can earn by holding equities compared to risk-free assets. Global equities have an ERP of 4.6%, while for US equities it is at 4%.
This can erode over time, but first interest rates appear firmly on the floor.
As far as valuations are concerned, they hover almost 22 times ahead of earnings for the US S&P 500 index. SPP, the highest since the dotcom bubble in early 2000. But then the index also changed dramatically with technology by far the largest sector component.
Since a third of the benchmark index, they are the ultimate pandemic companions for stay-at-home, especially those known as FANGMAN – an extensive tech group consisting of Facebook (FB.O), Apple (AAPL.O), Netflix (NFLX.O), Google (GOOGL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and chipmaker Nvidia (NVDA.O).
Their multiples of 80-100 times progress have led the broader market higher.
Until a few decades ago, banking, oil and gas and industrial stocks accounted for a large share of the S&P 500. These sectors typically earn at lower multiples, given the volatility of commodity prices and high demand on the cap – a major reason behind this year’s underperformance of Britain’s FTSE benchmark.
“What is strange about the market debate is that it is set up this way: look at the S&P 500 and the answer is that the stock market is expensive. Then you ask people what they like and they favor a lot of secular growth, high-multiple stocks, ‘said Morgan Stanley chief cross-asset strategist Andrew Sheets.
A ratio of U.S. equities on a market-weighted basis and an equally weighted stock index is at its highest levels since the 2008 crisis, indicating that it is dominating the handful of major tech stocks in the market.
For a picture on call ratio Put: here
The valuations make some more sense because of the lower for longer-term interest rate environment, said Maximilian Kunkel, CIO of Global Family Offices at UBS.
“As a result, we remain constructive on risk assets, even after the rally.”
Many others would agree. In derivatives markets, the put-to-call ratio for US equities, a measure of position value, is the lowest since 2010. The ratio is inversely related to equity performance.
Some caution is warranted though, considering the asset classes of all stripes. A portfolio with a 25% split in equities, bonds, cash and gold would have earned a record 18% in the last 90 days, BofA analysts calculate.
But the building is vulnerable to a rise in inflation, many claim, with investors’ holdings of yield-sensitive investments rising to $ 8.1 trillion over 18 months, according to Morgan Stanley.
Although prices have returned fairly quickly from deflationary territory, inflation remains well below central bank estimates, indicating that value estimates remain attractive.
Recent data shows that investors are switching from cash to stocks.
“I would still say that investors’ stocks are underweight and that provides a fairly decent backdrop for risk assets to ride,” said Jason Borbora-Sheen, portfolio manager at Ninety One Asset Management.
For a picture of SP500 against high-yielding US yields: here
For a picture of US performance from the US: here
Report by Saikat Chatterjee and Thyagaraju Adinarayan, Additional Reporting by Sujata Rao; Edited by Steve Orlofsky
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