What do investors think will happen next with Covid and the stock market, with Winter fast approaching? Investing is as much about human emotion and anticipating the actions of other investors, as it is about picking fundamentally sound stocks, regions or assets.
In September, Bank of America surveyed 224 fund managers with $646 billion in assets under management to find out what THEY think is going to happen next in the markets.
Today we’re dissecting what these market leading investors think is coming, and how it can help us to invest through a likely turbulent market this Winter.
Fundamentally Optimistic
When asked the big question – when is a Covid vaccine going to arrive? – investors are predicting that a vaccine for Covid-19 will be available in the first quarter of 2021, with 37% believing a credible vaccine will be announced by 30 January 2021.
Let that sink in for a second. A majority of market plays are being based on the assumption that life will be returning to normal by March next year, and over a third of investors are looking as near-term as January.
To us, this is incredibly optimistic to the point of foolishness. But whether you’re an optimist – or a pessimist, like us, who believe a working vaccine is still many months away, if ever – knowing how the market thinks works in your favour. Many stocks will rise or fall depending on the outcome of that question.
A vaccine by Spring 2021 means planes are flying, office working resumes, physical shops survive, night-life isn’t curfewed, people keep their jobs and money moves around the banking and housing sectors.
No vaccine by Spring 2021 means the opposite of all these things.
The World Will Bounce Back
58% of investors say that a new bull market has begun, compared to just 25% in May, and the majority are predicting global growth will rise in the next 12 months.
For the first time since February, more investors are saying that the global economy is in an early cycle phase, rather than being in a recession.
Early cycle phases follow recessions, and it means that the world economy is starting a climb back to strength.
This may very well be true. The world is a big place, and not everywhere will close down their economy at the first sign of cases rising.
While here in the UK our first instinct is to economic shutdown, mass unemployment, and a removal of freedoms, in countries which realise they can’t afford the luxury of a second lockdown, they will allow their economies off the leash instead.
In many regions of the world, people will be allowed to continue making their livings and building their countries back to wealth.
Cash Jitters
It’s not all sunshine and rainbows though. While investors do on the whole think a recovery is more likely than not, they are not so confident as to put all of their money where their mouth is.
Cash levels rose amongst fund managers, up from 4.6% to 4.8%. This doesn’t sound like much, but we’re talking 4.8% on trillions of investable dollars here.
The normal range is between 4% – greed; and 5% – fear. 4.8% from 4.6% puts them 20 basis points closer to fear on the scared-ometer. Fund managers are hopeful, but edgy.
Rotating Away From Large Growth Stocks
Fund managers are rotating away from large cap growth stocks like the FAANG tech stocks, after the massive rally from March lows.
We think investors are turning away from big tech too early – it has a lot of room still to run, despite being at all-time highs, which we think is the sticking point for fund managers.
They struggle to justify buying big tech stocks when PE ratios are heading into the high double digits.
We’ve covered this plenty before but just to recap, there is a ton of growth opportunity still for all of the big tech companies, especially if you are more pessimistic about the covid situation than the market seems to be right now.
More lockdowns mean more opportunity for cyberspace to take over.
Tech Is Still There
Despite investors halting their purchases for tech, it is still there in their portfolios as the most popular positions overall.
Current investments into Tech are still the most crowded trade area of all time. The tech-heavy Nasdaq has surged 60% since March lows.
Value Stocks Are More Popular
Money has been flowing out of growth stocks, into value stocks – but on a targeted basis.
Value stocks, which are stocks with a low Price Earnings ratio, are more popular than stocks with higher Price Earnings ratios for the first time since the pandemic started.
However, value stocks whose industries are in particular trouble – energy companies and banks – are still being avoided.
This means it could be a good time to buy oil and banks, if you are a value investor and believe in their long-term potential. These stocks are being shunned by the market right now.
Oil stocks have returned to the lows last seen in March after shooting up over the summer.
We still believe the future needs oil – we just don’t need much of it right now while planes are not flying and cars are not commuting. It strikes us that the market is being short-sighted on oil, which is why we’re holding our positions in BP and Shell.
Small Caps Up
Fund managers are shunning large caps and turning to small caps, which we’ve been saying for some time now are the end of the market best poised for growth, as we prepare to enter a redesigned economy in 2021.
Only 14% of professional investors said they think large caps will outperform small caps, the lowest outlook on large-cap stocks since July 2018. So looking for small caps with strong fundamentals is growing in popularity.
There will be a flood of companies going bankrupt and entering the history books before this crisis is over.
Investors are picking the future winners from the small caps pool of stocks which will replace them.
A relatively undiscovered gem in Ben’s portfolio is Dotdigital (DOTD), a digital marketing platform. It’s a UK small cap tech company, with market cap of £408m, which soared on the news of harsher UK lockdown measures in late September.
Based on its fundamentals, it’s a very good bet to be one of the future winners. It’s a high-quality stock with great returns, with a strong track record on EPS and dividend growth.
It’s health scores on Stockopedia have it as incredibly safe – backed up by a big pile of cash. Hopefully we won’t be referring to it as a small cap for very long!
Start investing without any fees by using the Freetrade app, and you’ll be given a free share on sign-up worth up to £200 – when you use our link on the Offers Page.
Always do your you own research but if you are interested in Dotdigital you can find it on Freetrade along with thousands of other stocks and ETFs.
Biggest Risks
The biggest risks to the stock market are seen as: (1) a Covid second wave; (2) a tech bubble popping; and (3) the upcoming US election.
Obviously a second wave of Covid would cause a high level of disruption. As for a tech bubble, we don’t see that there is one.
Yes, all tech companies seem to be highly priced right now, but that is reflecting their future profit-making potential.
Some do have silly prices, and some will come to nothing, but a company like Amazon with a PE of 100 probably does have the potential to grow and grow. Did you know it’s only currently in 18 countries?
Its logo is on our TV screens, on piles of packages by our front doors, on our music players, our e-book readers, and all over cloud software being adopted by more and more companies every day.
As for the US election, this is another potential game changer. If Trump wins, it’s more of the same for the US stock market, which reacted favourably to his tax cuts and has seen 4 years of record growth.
If the Democrats get in, it might be worse for US stocks, if only in the sense that if something is already at an all-time high, changing the rules of the game are more likely make it fall. But they may do better with calming the trade wars with China – who knows.
But the Democrats are likely to increase taxes and regulations on big companies.
Investors Still Love America
Despite dialling down on tech and healthcare, the US is now even more favoured by investors than in preceding months.
The Eurozone, emerging markets, and UK are generally less popular, except for some UK value stocks.
We think investors need to be careful here. While we agree that the US is home to the world’s best companies, their awesomeness is very much priced in to share prices.
The PE ratio of the S&P500 is 24, while the UK’s FTSE 100 is just 15.
The UK is being shunned by investors right now, and we ourselves have been critical of the FTSE 100 for being full of dinosaur industries like mining and retail.
But it’s wrong to ignore the UK completely. When everyone else is shunning a market, it’s probably time to invest.
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What’s going to happen next with Winter and the economy do you think?
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