November was the month of the dog
They say that every dog has its day and in the investment markets the dog sectors of 2020 have finally escaped their lockdown to enjoy some time in the sun.
The catalyst was Pfizer’s 9 November announcement that their vaccine was 90% effective. Finally there was some credible vaccination news that put a timeframe on beating down COVID-19 across the globe. So, if all human interaction was going to get back to normal over 2021, then traders could move back into the economically sensitive stocks that had been so severely sold off.
As a result, the US share market rose 12% for the month (its best for over 30 years), much of Europe was even higher and the Australian share market rose 11%.
The table below shows that the biggest gains on the Australian stock exchange in November were in the most beaten up sectors, like oil stocks, office buildings, banking and shopping centres.
Source: Bennelong Long Short Equity / Bloomberg
Standouts were stocks like Oilsearch (+49%), Unibail-Westfield (+75%), Flight Centre (+55%). Being positioned for these rises seems obvious in hindsight, but only very brave or oblivious investors hold shares for long in loss-making companies that are running out of capital. Many of these troubled stocks are still down 50% or more for the year.
One question now is – will we see the comeback of “value” over “growth” investing? The value tribe won hands down in November but have a long way to go to catch up with growth stocks over 2020. The following chart shows that in the US, growth stocks are still over 30% ahead in 2020, whilst value stocks are around breakeven. The theory has it that if economic growth can be sustained and interest rates rise, value stocks will catch up. Over very long periods value has beaten growth handsomely, but not since we entered the low growth, low interest rate regime since the GFC. The argument to stay with growth stocks is that interest rates will stay low and the pace of disruption is now so quick that innovation, market share gains and future earnings are more important than ever.
So it is interesting that growth stocks (which have never been as expensive as they are today) participated strongly in the November rally too, which indicates strong overall cash inflows into global sharemarkets, rather than a rotation from one sector to another.
Of course, in the short term, markets can just as easily over-react as well as under-react to news. The lightening speed of the November “melt up” puts the market technically into “overbought” territory, a technical chartist’s signal which warns that recent gains may not be able to be sustained. But on the other hand, the economy has a lot of catching up to do and we haven’t had much to celebrate for a very long time.
So where does this leave us? The good news is that we seem to be entitled to “de-risk” the COVID shadow over our portfolio thinking, and the US presidential election outcome seems to be settling down nicely. Central Bankers around the world are keen to hold interest rates down, politicians are spending, job numbers are better than initial fears (in Australia and many Western countries) and we’re moving into a season of traditionally strong market returns. The politics with China is a worry of course, and we should remind ourselves that news is “priced in” immediately – in any free market there’s always as many sellers as buyers at the prevailing price.
The chart below shows how various investment sectors and countries have recovered since their March 2020 lows. The negative red bars on the left give us some clues as to where the remaining pockets of value might lie. They are of course, by definition, the areas most people are still uncomfortable about.
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