Weekly Investment Strategy: February 12th
February 12, 2021
Review the latest Weekly Headings by CIO Larry Adam.
- Rescue package isn’t the one & only deal expected
- Still smitten with emerging market equities
- The health care sector still has our heart
Happy (Early) Valentine’s Day! Given that the COVID-19 pandemic has caused the loss of nearly a half million loved ones in the United States alone, I feel more grateful than ever for my four valentines—my wonderful wife and three amazing daughters. I hope that whether you celebrate with cards, chocolate, or flowers, that you’re able to spend the holiday with the ones you most care about. While red may be the color of the day, it is a color that investors are hoping not to see for any asset classes in the year ahead. However, just as in a healthy relationship, we cannot take the improving COVID-19 trends for granted and become complacent about the future returns we expect to come our way. That is why we ‘wear our hearts on our sleeves’ and continuously provide investors with timely, thoughtful insights. Looking at some of the developments so far this year, we’ll review a few key components of our economic and financial market outlook without ‘rose-colored glasses.’
- Removing The COVID-19 Thorns From The US Economy | Roses are red, violets are blue, US economic growth is bound to breakthrough! After suffering its worst year of economic growth since 1946 (2020 Annual GDP growth: -3.5%), the US economy is forecasted to post its best year since 2000 (est. 2021 annual GDP growth: 4.0%). This 7.5 percentage point swing would not only mark the largest rebound in growth on record, but would also bring GDP back above pre-pandemic levels. But in the near term, until herd immunity can be reached, there may still be a few ‘heartbreaking’ moments for certain industries and sectors as consumer behavior is still impacted. According to Bloomberg, less than 25% of consumers plan to enjoy an evening out to dinner this Valentine’s Day. The lowest percentage in the survey’s history translates to $1.5 billion less in spending. While consumers splurging less on their ‘sweethearts’ is just one example of shifting consumer behavior, the cumulative impact of such behaviors will continue to have a near-term impact. Our much ‘rosier’ outlook for the long term is supported by action on both the policymaker and vaccine fronts. The Federal Reserve has signaled it will remain on hold through 2023, the Biden administration has proposed a rescue fiscal package (with hopes of a recovery package later this year), and the pace of inoculation has drastically improved (~1.5 million daily). With these supports in place, the US economy should be able to distance itself from the darkest days of the pandemic and be poised for a strong, consumer-driven rebound in the second half of the year.
- Our Love for Emerging Market Equities Is Not Blind | Entering the year we expressed our bias toward US equities, but within the international space we held a preference for emerging markets over the developed markets. This ‘profession’ has shown to be true so far, as emerging markets have rallied over 10% year-to-date (third strongest start to a year on record) and are outpacing the developed markets by the widest margin at this juncture since 2001. Despite this outperformance, emerging market equities remain the ‘apple of our eye’ due to several fundamental factors. First, with gradually improving economic data across the globe, emerging market economic growth is expected to outpace that of the developed markets by the widest margin in four years. Second, even in light of the recent rally, emerging market equities are still trading at a ~20% discount to global equities. And lastly, emerging market earnings growth is expected to exceed that of global equities in both 2021 and 2022. After having a ‘heart-to-heart’ with the underlying fundamentals, our international exposure is still biased toward emerging market equities.
- No Love Lost For The Health Care Sector | The Health Care sector has trailed the S&P 500 by 18.7% over the last 9 months—a record-setting degree of underperformance. While the sector’s lagging performance has been rather ‘heart-wrenching,’ we do not believe it is aligned with the positive fundamental tailwinds for the sector. First, when it comes to consistently strong earnings, the Health Care sector is ‘better than a box of chocolates.’ The resiliency of the sector’s earnings has been on display the entirety of 2020, as it boasts the strongest sales growth of any sector and was one of only two sectors to not experience a quarter of negative year-over-year earnings growth in the midst of COVID-19. Second, these positive earnings and sales growth trends should continue moving forward, as catalysts independent (e.g., politics, aging demographics, new drug development) and dependent (e.g., vaccine development, digital contact tracing, telehealth, testing and protective equipment) of the virus have called for substantial investment in the sector. Lastly, despite the earnings strength, the Health Care sector is trading at a 27% discount relative to the S&P 500 (NTM basis)—the lowest level since 2008 and within the first percentile over the last 20 years.
Video recorded November 13, 2020. All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.