INVESTING
If you missed the reopening trade the first time around, this may be your chance. Pelletier,
Global equity markets have rallied in a big way since last year’s lows and with year-todate gains ranging from 6.0 to 11.5 per cent, it isn’t a wonder that many are questioning just how much juice is left in the rebound.
Experience tells me that often all it takes is the simplest excuse to trigger a bull market correction. Perhaps this time around it will be the mounting worries over the impact of new lockdowns as the third wave of COVID-19 and the variants wreak havoc on countries that are behind on securing and deploying vaccines.
Interestingly, we’ve noticed that the POST-COVID economic recovery trade — which saw a shift to the cyclical, value-oriented segments of the market — has begun to unwind, with investors moving back into tech over the past few weeks. For example, the Nasdaq is up nearly six per cent in the past month while U.S. energy producers are down nearly 10 per cent.
In our opinion, this is creating a second opportunity for those who missed out on repositioning into the post-pandemic trade.
While new market highs are making headlines, it’s important to realize that not all sectors are moving in lockstep, with some still providing opportunities for investors. We see three areas in particular that could offer attractive upside, especially as vaccines get deployed and lockdowns come to an end, something we’re currently witnessing in some large economies, such as the U.S.
The first opportunity is in energy markets. While oil and gas stocks have had a nice rally from their lows, we think there is tremendous upside remaining. Take a look at oil prices, which are up nearly 265 per cent in the past year, a rise that is significantly greater than the 60 per cent growth that oil stocks have seen. That big run means that over the past five years, oil is now up 41 per cent while oil stocks are down 47 per cent.
While oil prices have participated in the underlying fundamental recovery of energy markets, oil stocks clearly have not. This means stocks are discounting significantly lower oil prices in their valuations, something history has shown typically doesn’t last for long. For some additional perspective, the bearish narrative on oil stocks is so bad that the discount to current oil prices is at its widest point in the past 15 years. As a result, here in Canada, many oil stocks are in a solid financial position with cash flows under the forward curve that would be able to buy back all of their outstanding stock and debt within five to seven years.
The other area that we think looks very enticing is the low or minimum volatility sector. These are ETFS that own stocks that exhibit lower levels of volatility. Take the MSCI Min Vol Index that is up only 3 per cent this year compared to the MSCI World Index that is up eight per cent. This gap is even more significant when expanding over 12 months with the Min Vol up only 4 per cent versus 29 per cent for the World Index. For some additional perspective, according to Bloomberg, more low quality companies with no earnings have seen their stocks double over past year than ever before including the 2000 dot-com bubble. We expect this gap will narrow in a POSTCOVID scenario as investors grow tired of the overcrowded, higher volatility sectors like tech and warm to the merits of the broader and more boring segments of the market that are driven by the economy.
Finally, we are overweight structured notes, which have been a very effective tool in adding higher levels of absolute income into portfolios with reduced risk via their implied downside barriers ranging from 25 to 50 per cent. This fits very well with our view that the long-term narrative is bullish despite the potential for a near-term correction. While technically classified as equity from an investment policy statement, we think they can be a good replacement for certain areas of the fixed-income market like junk bonds, which are trading at record-low yields.
In closing, we think investors should try not to let fears about the market take control of their portfolios, while at the same time avoiding FOMO and the urge to chase frothy sectors such as tech. For the contrarians out there, perhaps it’s time to consider what will happen in the economy when pent-up savings are deployed at the same time that governments unleash record levels of fiscal spending, two forces the magnitude of which we have never seen before.