hongkongen
Beat the headline

Beat the headline

25-01-2021 | Column
The events that have unraveled over the last quarter have added support to our constructive stance on global equities. We have had the approval of high-efficacy vaccines, and a clear outcome from the US elections. The incoming US administration, now strengthened by a win of the Senate de facto majority, is set to unleash further stimulus. Add to this a continuation of the easing bias of the largest central banks, and equity markets remain well underpinned.
  • Fabiana Fedeli
    Fabiana
    Fedeli
    Global Head of Fundamental Equities

Speed read

  • It’s not growth vs value, it’s headline vs fundamentals
  • The global economy is on the mend: we upgrade the earnings factor
  • Time to dig deeper: the enablers and the parallel stories

The biggest risk, at this point, is the emergence of vaccine-resistant new strains of the virus

Of course, let’s not kid ourselves: none of this is will imply a straightforward path ahead. First, the distribution of vaccines has had a slow start in most countries. Second, the win of the two Georgia Senate seats on 5 January 2021 implies a de facto ‘blue’ majority, given the tie-break vote of Vice President Harris. Yet, this does not offer free reign to the Biden administration on all of its planned policies, as the administration’s legislative proposals could be blocked in the Senate by filibuster.

While we recognize the hurdles ahead, we believe that neither of the two issues are reasons enough to change our supportive stance on global equities. They could, however, cause occasional negative market reaction. As we have maintained for the last few quarters, the Covid-19 outbreak and its impact on the economic recovery remain the key drivers behind equity markets.

The amount of resources put in by governments and the healthcare community to increase the vaccination rates worldwide is unprecedented. This bodes well for rapid improvement, although certainly not at light speed. The biggest risk, at this point, is the emergence of vaccine-resistant new strains of the virus. Thus far, this does not appear to be the case.

US elections: we have moved to Goldilocks territory

The result of the Georgia run-offs has changed the investment playground for equity investors, arguably for the better. Within the limits and implications of potential filibuster, large parts of the Biden administration’s agenda can be achieved with a slim majority in Congress. This includes the approval of policymakers, as well as more stimulus, environmental policies and changes to the US healthcare system than we would have had with a divided Congress.

Of course, the amount of funding for stimulus, climate and healthcare initiatives will be limited by the need for a budget reconciliation process. This is not a bad outcome for equity markets, as it will actually provide a silver lining for US investors concerned by the more left-leaning potential policies of a Democratic administration. From this point of view, we have moved to a ‘Goldilocks’ scenario. Not too hot, not too cold.

There are two areas within equities, however, where we could see a tangible negative impact. First and foremost, with the approval of policymakers being only dependent on a simple Senate majority and not affected by filibuster, we are likely to see nominations that will bring more regulatory scrutiny on the financial sector, big data, and high environmental impact industries. For the financial industry in particular, the negative effect of higher scrutiny could be offset by the benefits of an economic rebound, but it will all depend on degrees of magnitude.

The other area of potentially negative impact will be healthcare. Given the narrow Congress majority, the outcome of the US elections is still broadly positive overall for the healthcare sector, with radical reform likely to be off the agenda. However, within healthcare subsectors, the impact will be different.

For example, life science tools companies are likely to benefit from increased funding to support the US academic research base, particularly given the on-going pandemic. Conversely, we could see setbacks in the sentiment recovery for the pharmaceutical industry, as market anticipation of drug price reform has now been raised. In reality, such reform is still likely to be relatively limited in scope, given the slim Senate majority, and also pushed back in time.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

The problem with valuations is that they are averages

While average valuations have risen across equity markets, we do not believe we are at the point yet where they will put a damper on global equites upside. Not all markets are richly valued, and certainly not all stocks. The exceptional polarization that we have seen in stock performances over the last three quarters still allows investors to find attractive stocks at more reasonable valuations.

The exceptional polarization that we have seen in stock performances over the last three quarters still allows investors to find attractive stocks at more reasonable valuations

On a relative basis, we find more attractive investment opportunities in North Asia and Europe than in the US. Importantly, valuations are not sufficient to determine the attractiveness of a market. Relative earnings growth will continue to be the real discriminant, and this will be the key variable to monitor.

The Headline Effect

The polarization in market performance over the last year brings me to what I believe could become one of the most remarkable legacies of 2020. Last year was a year of extremes. The five largest stocks in the S&P 500 Index returned 64.5% versus an average return of 9.7% for the remaining 495 names. Last year also saw the highest number of daily moves over 1% and 2% in ten years, for the S&P 500 Index.

I cannot help but think that this has something to do with another record: retail investors’ participation in equities trading. According to Bloomberg Intelligence, individual stock trading through June 2020 was at a 10-year high, with retail trades estimated at 19.5% of all US order flow, up from 10.1% in 2010 and 14.9% in 2019. And this was not a US-only phenomenon. Retail trading accounts have been rising across the world.

While I do not have any clear proof that increased retail investor participation is a key driver behind the divergences in market behavior in 2020, what clearly appears in the market is a certain ‘headline effect’. Stocks that have a well-recognized brand, or a well-recognized story have seen unprecedented buying relative to the rest of the market.

This leaves an opportunity for investors that are willing to go the extra mile in researching stocks. For all the well-known new energy and new vehicle names, for all the well-known digital giants, there is a number of stocks that I like to call enablers, which are part of the chain of products or services which support those well-known players, as well as stocks that will be driven by those same trends, as they may make products that are not as glitzy, but that will be growing in parallel. That is where the ‘value’ is. Many of these stocks are still trading at reasonable valuations.

Implications for our portfolios

Both our Developed Markets and Emerging Markets teams have turned more positive on their respective equity markets. The common denominator is the upgrade of the earnings factor, as earnings revisions have significantly improved across developed and emerging markets and are now positive in both regions. Importantly, the earnings recovery appears broad based, as earnings revisions are improving across most sectors.

Earnings revisions have significantly improved across developed and emerging markets and are now positive in both regions

As vaccinations and better therapies help mitigate the extent of the Covid-driven economic lockdown, and activity continues to normalize, we expect further rotation from the Covid-beneficiary and Covid-defensive countries and stocks, toward countries and stocks that will benefit from the economic normalization. In the US, such rotation will be further supported by additional stimulus.

We are not concerned about the recent increase in US long-term yields, as these came on the back of the stimulus expectations and we don’t expect inflation to rise to levels that can stifle equity markets for the remainder of 2021. We continue to caution that selection remains key, as not all companies will be able to recover from the effects of extended lockdowns.

Overall, from a regional perspective we continue to favor emerging markets, which is our largest overweight position in our Global portfolios, followed by Europe. We find a few interesting opportunities in Japan, particularly in the technology sector. Within emerging markets, we continue to favor North Asia (China, Taiwan and South Korea).

In emerging markets, initial signs of Covid-19 deceleration and of a turnaround in economic momentum are starting to appear outside of North Asia. These will eventually warrant broadening our emerging markets positioning, and, on this basis, our Emerging Markets portfolios have increased their position in India. But these are relatively small moves and we would need to see further progress before we significantly increase our relative positioning outside of North Asia.

From a sector standpoint, our largest global overweight position is in technology, although we have cut further our positioning in the tech savvy high flyers in the US and Asia, as comparison bases are destined to become more challenging in the next two quarters and regulatory scrutiny is here to stay.

We have also taken additional profit from the Communications Services sector. We find more opportunities in Industrials, Consumer Discretionary, Specialty Materials and Healthcare, and have selectively added to Financials in the US and in emerging markets. Within healthcare, we have added to life science tools.

Last but not least, we continue to like sustainability as a theme. Besides the European ‘Green Deal’ and an increasing number of Asian markets pledging carbon neutrality by 2050-2060, the Biden administration with a united Congress should also trigger more investment in this area in the US.

The main risks to our outlook could be new virus outbreaks, or slower than expected vaccination campaigns, which we will continue to monitor.

Above all, we still find compelling opportunities in a market where polarized positioning was the name of the game in 2020. The jury is still out on whether this is due to increased retail participation. In the meantime, there is still plenty of upside potential for active investors willing to look beyond the headlines.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree