Today’s $72 trillion question for investors: To buy or not to buy into the international equities rally? Notwithstanding inflated share prices, politics and the pandemic, the response from many is a resounding “yes.”
That is not just because unprecedented stimulus – $20 trillion and counting – is pushing a structural shift in how financial assets are valued.
Additionally, it is down to years of social shifts, innovation and today, the pandemic, which could change forever the way people work, research and store – playing to the dominant hand of technology stocks.
So while revived coronavirus outbreaks and looming US elections have made some investors wary, many equity bulls are hanging in there, having already boosted the value of stocks internationally by $24 trillion because end-March.
As international equities near record highs, strategists say the quickfire bear-to-bull change wasn’t only justified but deserves to proceed farther.
With tech stocks, especially those within the platform economy holding on for their eye-popping gains, investors say the next leg of the rally is very likely to come from stocks – so called because they trade at cheaper valuations than their growth-oriented peers.
Stocks are profiting naturally from above-average equity-risk premiums, the return one can make by holding stocks compared with secure assets. Global stocks carry an ERP of 4.6%, while for US stocks, it is at 4%.
That might erode over time, but for now interest rates seem firmly stapled to the ground.
In terms of valuations, they’re hovering near 22 times forward earnings for the US S&P 500 index, the highest since the dotcom bubble in early 2000. But then, the indicator also has changed dramatically with technologies by far its main sector component.
Making up around a third of the benchmark index, they’re the ultimate stunt stay-at-home beneficiaries, particularly those called FANGMAN – an enlarged tech team comprising Facebook, Apple, Netflix, Google, Microsoft, Amazon and chipmaker Nvidia.
Until a couple of decades ago, bank, gas & oil, and industrial stocks made up a majority of the S&P 500. These businesses typically trade at lower multiples, given commodity price volatility and higher capex needs – a significant cause for this year’s under-performance of the UK’s FTSE benchmark.
A percentage of US stocks on a market weighted basis to an equally weighted index of stocks is at its highest levels since the 2008 crisis, indicating the dominance of the handful of big tech stocks on the marketplace.
The valuations make all the more sense due to the lower for more interest rate environment, said Maximilian Kunkel, CIO of Global Family Offices at UBS.
Many others would appear to agree. On derivative markets, the put-to-call ratio for US stocks, a step of placement opinion, is the lowest since 2010.
Some caution is although justified, given that strength classes of all stripes have obtained. A portfolio with a 25% split in stocks, bonds, cash and gold could have earned a record 18 percent in the previous 90 days, BofA analysts compute.
But the edifice is vulnerable to a rise in inflation, many assert, with investors’ holdings of yield-sensitive investments up $8.1 trillion over 18 months, according to Morgan Stanley.
Though prices have rebounded from deflationary territory fairly quickly, inflation remains far below central bank estimates, indicating equity valuations will remain attractive.
Latest flows data shows investors are switching from cash to equities.
“I would still say investors are underweight equities which provides a fairly good background for risk resources to rally,” said Jason Borbora-Sheen, portfolio director at Ninety One Asset Management.
The team at Platform Executive hope you have enjoyed the ‘Tech fuelled ‘everything’s awesome’ rally looking unstoppable‘ article. Initial reporting via our content partners at Thomson Reuters. Reporting by Saikat Chatterjee and Thyagaraju Adinarayan. Additional reporting by Sujata Rao. Editing by Steve Orlofsky.
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