Equity markets high despite the crisis. What investors need to know.
COVID-19 and the resulting crisis have shifted important parameters for the economy, stock exchanges, and investors. The global structural change triggered by the virus is transforming the equity markets. Read about the key aspects which investors need to consider carefully.
Equity markets are changing
The coronavirus crisis has transformed many stock exchanges for good. To prepare themselves for the future, investors must carefully consider the following fundamental valuation parameters: index adjustments, monetary policy, and structural change.
- Index adjustments
In future, investors will have to pay much more attention to the regular index adjustments than usual, because 2020, the year of coronavirus, has triggered an unprecedented increase in index adjustments; this is due to the fact that the crisis has turned the ratio between winners and losers upside down. For investors, the consequence is as simple as it is important: They need to observe indices and their regular adjustments closely, since these trigger large capital flows. In addition, selecting a good benchmark index is trickier and more important than ever, because it can turn positive performance valuations into negative ones and vice versa. And for those who still wish to pursue their own line in a world where indices are becoming increasingly concentrated there are instruments highly suited to this purpose in both private equity and thematic investments.
- Monetary and fiscal policy
Globally, the crisis has ushered in a new era of monetary and fiscal policy, which are closely related. This is evident in the falling key interest rates and in particular in the capital market returns. The perpetuation of low capital market returns has increased the fair valuation of nearly all asset classes by approx. 20% to 30%. Will this last? In the long term, how the world overcomes the pandemic through medical and social measures will be crucial.
- Structural change
The pandemic has triggered global structural change. Global supply chains are changing and companies are adjusting their products and processes to protect their earnings power. In the political arena, the commitment to a faster change in climate policy is gaining momentum, not least due to the positive impact on the environment. A multi-faceted global structural change will generate both manifold winners and losers.
How investors can best handle investment styles
In order to avoid investing in losers, many investors are currently following three simple premises: Companies that are rapidly growing continue to be at a high, because they reflect corporate agility and ability to adapt. "Quality," meaning solid balance sheets with sound returns on capital, is also in high demand in uncertain times. In contrast, for the time being a low valuation or high dividend yield is not considered a stock exchange trump card, even though the below-average performance of "value" has fallen over the past three months compared to the value of the past three years.
The interplay between the two traditional investment styles "value" and "growth" is of central importance for investors. Those who set the right course here will generally reap the rewards for a number of years. It is also possible that, in the coming months, the strong economic recovery will bring forth a new leader. Over the last 23 years, "growth" has won over "value" in 13 of those years, while "value" triumphed in a total of ten years – between 2000 and 2007 and, for idiosyncratic reasons, in 2011 (euro crisis), 2016 (oil price increase), and 2018 ("flash crash").
The equities that are particularly attractive for investors now
With a view to the future, German equities are especially attractive for investors, as are those from China and Taiwan, in the current environment. To a certain extent, this combination allows investors to marry "growth" and "value," and cushion any risks. In this context, German equities are typically "value" securities with a cyclical profile (banks, automobiles, machinery, chemicals). As such, they are likely to benefit from the global recovery in the coming year. The fact that they are favorably valued and show a high dividend yield should give them additional tailwind in 2021. In contrast, Chinese equities are benefiting from their focus on technology, a large, fast-growing Asian market, their low valuation, and the stimulation of the market through government policy.
Global structural change is changing sectors
The COVID-19 pandemic is leading to structural change in various sectors, such as the energy sector. This is because, in the meantime, the pandemic has strengthened the political will for a decarbonization of the economy and change in climate policy. In light of this, the markets are rewarding those companies that focus on sustainable energy production and supply. For example, solar securities have seen gains of more than 100% since the start of the year.
The second-round effects of the crisis are highlighting the importance of "sustainability." Our recommendation for investors is clear: Sustainability as a Supertrend and an investment style will remain a valuable success factor for companies and investors, now more than ever.