Market attractiveness of equities: USA ahead, Europe catching up, growth before value
Luxembourg, 25 September 2020 – The global economy is on the road to recovery, although with large variations by region and sector. China is leading the recovery, Europe is following, the US is lagging and in some emerging markets the first major pandemic wave has just rolled in. “Nevertheless, we expect that the USA with its highly flexible economy will come out of the pandemic the best”, said Carsten Gerlinger, Vice President of Moventum AM. “As we anticipate a somewhat weaker dollar over the next twelve months, however, we are fully hedging our overweight in the dollar zone.”
The US economy is considerably more flexible and characterised by a high level of innovation and undisputed technology leadership. “It was not without reason that the US stock market outperformed in recent years”, explained Gerlinger. “Despite higher valuations, we therefore still consider the US stock market to be more attractive than the rest of the world in the medium and long term.” As a result, the US market will remain overweighted in Moventum’s portfolios. Most recently, the US equity market had only been supported by a few technology companies without which the S&P 500 index would be quite a bit lower.
“We continue to see growth before value”, said Gerlinger. Growth benefits from low interest rates. While cyclical stocks also benefit from an economic recovery, earnings estimates are still too high, particularly in this segment. Pharmaceuticals, especially drug manufacturers, are less attractive. The pressure on drug prices is set to increase, irrespective of the outcome of the US election. Biotech stocks should do better. “These are the companies where the majority of innovations are taking place and takeovers with attractive premiums by the big pharma and biotech players are a regular occurrence”, Gerlinger pointed out.
Although there could be increased volatility around the presidential elections on 3 November 2020, the outcome of the election will have no impact on developments on the US markets in the long term. Both candidates stand for high new spending, protectionism against China, albeit Biden in a different “tone”, and both want to inject a strong boost into the US economy. The fiscal and monetary policy measures adopted by the US government and the Federal Reserve will provide the US economy with considerable support in the coming months.
“We are increasing the share of Europe by using the weighting from the REITs sector, which we are reducing to zero”, Gerlinger added. Europe continues to suffer severely from the COVID-19 pandemic, but with great regional differences. Economies such as Germany are on a welcome path of economic recovery. While the reaching of pre-crisis levels is not yet in sight, the political agreement within the European Union on the adopted fiscal policy measures is viewed as positive overall.
The industry and thus the stock indices in Europe are more cyclical. There have been repeated minor interim rallies of cyclical stocks in recent weeks. “We do not expect a fundamental turnaround, away from growth and towards value, but cyclical sectors may still benefit from the economic recovery that has started”, said Gerlinger. “This is why we are invested in the small cap segment in Germany. Nevertheless, despite more favourable valuation, we are maintaining our overall European underweighting. We consider the banking sector in particular to be still unattractive. Increased provisions in bank balance sheets do not bode well”, Gerlinger explained. Many companies that have been weak for quite some time would become insolvent sooner or later. “As in the USA, however, we also favour the growth segment in Europe.”
The Japanese stock market remains unattractive as the economic impact of the COVID-19 pandemic cannot be ignored. In addition, there are the existing, homemade problems. By contrast, the emerging markets have done comparatively well in recent weeks. “Our commitment in Asia has developed very well. Many negative factors seem to have been priced in”, said Gerlinger. In South America, COVID-19 has taken full effect and continues to rage unabated so that the economic consequences will be more negative there than in Asia. Overall, the emerging markets are attractively valued and are benefiting from the weakening of the US dollar. “We currently consider the emerging markets to be neutral and see better opportunities in Asia than in South America”, Gerlinger concluded.
Additional information is available at www.moventum.lu.
Moventum Asset Management S.A. (Moventum AM) is a wholly owned subsidiary of Moventum S.C.A. The management company, in which Moventum’s asset management expertise has been concentrated since the beginning of 2019, manages Moventum’s own funds and individual mandates as part of its asset management portfolios.
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