How to spot the next round of market winners (and dodge the losers)

Russ Mould
28 April 2021

“Fund management legend Sir John Templeton once asserted that ‘Bull markets are founded on pessimism, grow on scepticism, mature on optimism and die on euphoria’ and investors could perhaps use this framework to work out where are now in the (bull) market cycle,” says AJ Bell Investment Director Russ Mould. “It might just help them spot where value and future upside opportunities can be found and – just as importantly – avoid areas which are so popular they could be overvalued and capable of doing damage to portfolios, especially as it can be argued that some areas of the markets are becoming bubbly.

“It is not easy to research an asset class, country or individual stocks, or what may be suitable funds, when no-one else is interested. It is harder still to avoid those which everyone is talking about with great excitement and therefore resist ‘fear of missing out,’ even if history suggests this is the best way to make premium long-term returns, as per Warren Buffett’s aphorism that ‘you cannot buy what is popular and do well.’

“The last 12 months are a fine example of how some careful, but not wilful, contrarian research could have yielded rich rewards. As the pandemic began to make its presence felt, share prices plunged, oil collapsed into negative territory and Government bonds’ haven status meant their prices rose and yields fell. Cryptocurrencies were tossed aside amid the general panic, too.

“Yet wind on a year, and 

•    Equities are beating bonds hands down

•    Within equities, Technology is no longer the leading equity sector and defensive areas such as healthcare are relatively out of favour. 

•    Commodities (with the notable exception of precious metals) are doing well 

•    Within fixed income, the riskiest option – high-yield corporate paper – continues to lead Government and investment-grade corporate debt and overall the perceived haven of bonds continues to underperform

•    Cryptocurrencies are way higher than a year ago and are firmly in vogue, as evidenced by the flotation of America’s leading crypto exchange this month (even if Bitcoin has stumbled again since then).

 
Source: Refinitiv data

“Within equities, Latin America and Asia are doing best.

“In the case of the latter, this may owe much to the relatively limited impact of COVID-19 upon their populations’ health and their economy, at least compared to the West and certain key emerging markets – although a resurgence in India is clearly a concern on so many fronts and Japan’s relative outperformance is ebbing as it declares a state of emergency in certain prefectures. Asia will have also learned from prior outbreaks such as SARS and swine flu and was, in many cases, better prepared as a result. 

“Latin America’s rise to the top is not as easy to explain, given the dreadful suffering of the Brazilian people owing to COVID-19 and ongoing economic chaos in Argentina and Venezuela. A recovery in commodity prices is one possible factor, while another is signs of inflation in Brazil, as well as the usual suspects, Argentina and Venezuela. Shrewd money may be heading for real assets (or at least paper claims on them, via shares) and feeling cash. 

“It is also interesting to note that US markets, while still doing well, are no longer the only game in town.

 
Source: Refinitiv data

“This is also reflected in sector performance. A year ago, technology was leading the way while defensive areas like healthcare were also popular with investors. Yet cyclical, turnaround sectors now lead the way, with defensives and income-generating bond proxies lagging badly. 

“All of this fits the prevailing narrative that the combination of vaccination programmes, Government fiscal stimulus and ultra-loose monetary policy from central banks will see the economy through the pandemic and provide a firm base for a robust economic recovery.

 
Source: Refinitiv data. Based on the S&P Global 1200 indices. 

“So too do the losses on long-duration Government bonds and the outperformance of high yield debt. The latter tends to correlate more closely to equities than it does fixed income. A strong economic recovery would help to bring financially stretched firms back from the brink and leave them better placed to meet coupon payments and return principal upon maturity of their debt. 

 
Source: Refinitiv data

“Increased Government bond yields (and lower prices) are a result of the market anticipating a strong (and possibly inflationary) recovery. This is also leading to a resurgence of interest in ‘value’ stocks, for want of a better term, those firms whose fortunes are closely linked to a recovery and may therefore be capable of offering rapid growth in near-term earnings. A year ago, technology stocks – ‘growth’ – were in vogue, as they were seen as capable of offering increased profits almost whatever the economic backdrop and of doing so consistently over time.

Source: Refinitiv data

“This is an entirely subjective view, but analysis of those performance statistics means the major asset classes could be categorised as follows, according to Sir John Templeton’s four-phases framework, as we head into summer 2021:

Pessimism

 

Scepticism

Commercial real estate stocks

 

Long-duration Government bonds

Brick and mortar retail

 

US Government bonds

Precious metals (and miners)

 

Healthcare stocks

 

 

Bond proxy equities - telecoms, utilities

 

 

Oil and oil stocks

 

 

Value and income investing

 

 

 

Euphoria

 

Optimism

Cryptocurrencies

 

US (and global) equities

Index proliferation

 

Renewables and ESG-theme funds

Residential property

 

Technology stocks

SPACs

 

High yield corporate debt

 

 

Industrial metals (and miners)

 

 

Growth and momentum investing

“Euphoria – and optimism - are a lot easier to find than they were a year ago. This is not to say that markets are primed for a collapse, but it may not take much to shake them up a bit as a result (even if the debt-laden Archegos and Greensill affairs are raising surprisingly few alarm bells so far, given the importance of borrowing to the foundations of both the global economy and the risk-on rally of the past year).

“Scepticism pervades fixed income and Government debt, so anyone who fears disinflation or deflation more than inflation could take this as a cue to top up allocations. 

“Conversely, anyone who sees the world returning to normal quickly could seek out value on commercial property stocks or funds, especially those with exposure to office space.

“Those portfolio builders who are wary of a market wobble – and suspect that central banks will respond with every greater monetary largesse in the event of one – may note with interest the underperformance of gold and miners of precious metals.”

Russ Mould
Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993, he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

Contact details

Mobile: 07710 356 331
Email: russ.mould@ajbell.co.uk

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