Investment Insight | The silver linings playbook.
The Delta variant and recent economic data have markets worried about the global economic recovery. In this Investment Insight, we detail why we remain positive for the remainder of 2021 and why now is the time to rebalance your portfolio and invest in preparation for a positive six months.
The last four months have seen interest rates and economically-sensitive shares decline. This has been the reason for recent underperformance. It is exactly what one would expect if the economy was at risk. But as August turns to September, we think this story will shift. Growth optimism should come back, interest rates will look to increase, and commodities recover.
Our faith here is tied to several factors.
While COVID cases are rising, so are vaccination rates, which reduce the intensity of hospitalisations relative to prior waves. Various experts believe that United States COVID-19 cases could peak in late August or early September, a decline which could improve growth sentiment and increase optimism as the Northern Hemisphere returns from summer holidays.
To be clear, rising cases of the Delta variant is not good, especially in the developing world where vaccines and medical care are scarce. Even in the developed world, many fear it will get worse before it gets better. However, for investors, it is worth remembering caseloads alone didn’t bring the downturn we saw in early 2020. Lockdowns, then a major, unprecedented shock that suddenly interrupted economic activity, were behind it. This is becoming less common as vaccines rise.
Further reason to be optimistic is that, after years of chatter (remember Trump?) and months of debate, the United States Senate passed the US$1.2 trillion bipartisan infrastructure plan by a decisive 69 – 30 margin. This further stimulates the United States economy, creating employment and earnings across multiple sectors. The size of the United States bill puts the controversial NZ$700 million Auckland Harbour Bridge crossing into perspective.
Finally, while earnings results are backward-looking, there is one aspect of the recent second quarter earnings reports that we do think is meaningful looking forward. Gross profit margins are currently 33% for the S&P 500. This shows companies have a lot of bandwidth to absorb higher costs and slowing demand while remaining profitable.
We think this is a reason to be optimistic about growth shares. Even as cyclical shares become attractive as the economy recovers, growth shares have the biggest gross margins and are best-positioned to weather periods of slow growth. Growth stocks tend to capitalise on long-term trends, not the economic cycle.
We think Fisher Investments, who will join the NZ Funds Connects call on 16 August, perfectly describe the current environment:
“We have all been through an excruciating 17 months since last February, including a record-fast trip from all-time highs to bear market lows—and back! Some folks’ nerves have likely worn thin. The news flow has felt frantic at times.”
Fisher Investments Founder and Executive Chairman, Ken Fisher, calls the share market “The Great Humiliator,” which used the speed of last year’s market decline to amp up investors’ myopic tendencies. As a result, every wobble feels monumental.
You can see this when so many headlines and articles extrapolate a single day’s decline with a historically insignificant magnitude – like last Monday’s drop, which was the biggest since May 12, itself a date with no notable significance.
We remain positive for the remainder of 2021. More importantly however, if you are investing longer-term to finance your long-term needs such as retirement, then look farther out. Look to the high likelihood that society is even better at living with COVID 12 to 18 months from now than it is today. Look to the low likelihood there is a share market shock lurking. With this mindset, you will be able to conclude, like us, that now is a great time to be invested.
The last four months have seen interest rates and economically-sensitive shares decline. This has been the reason for recent underperformance. It is exactly what one would expect if the economy was at risk. But as August turns to September, we think this story will shift. Growth optimism should come back, interest rates will look to increase, and commodities recover.
Our faith here is tied to several factors.
While COVID cases are rising, so are vaccination rates, which reduce the intensity of hospitalisations relative to prior waves. Various experts believe that United States COVID-19 cases could peak in late August or early September, a decline which could improve growth sentiment and increase optimism as the Northern Hemisphere returns from summer holidays.
To be clear, rising cases of the Delta variant is not good, especially in the developing world where vaccines and medical care are scarce. Even in the developed world, many fear it will get worse before it gets better. However, for investors, it is worth remembering caseloads alone didn’t bring the downturn we saw in early 2020. Lockdowns, then a major, unprecedented shock that suddenly interrupted economic activity, were behind it. This is becoming less common as vaccines rise.
Further reason to be optimistic is that, after years of chatter (remember Trump?) and months of debate, the United States Senate passed the US$1.2 trillion bipartisan infrastructure plan by a decisive 69 – 30 margin. This further stimulates the United States economy, creating employment and earnings across multiple sectors. The size of the United States bill puts the controversial NZ$700 million Auckland Harbour Bridge crossing into perspective.
Finally, while earnings results are backward-looking, there is one aspect of the recent second quarter earnings reports that we do think is meaningful looking forward. Gross profit margins are currently 33% for the S&P 500. This shows companies have a lot of bandwidth to absorb higher costs and slowing demand while remaining profitable.
We think this is a reason to be optimistic about growth shares. Even as cyclical shares become attractive as the economy recovers, growth shares have the biggest gross margins and are best-positioned to weather periods of slow growth. Growth stocks tend to capitalise on long-term trends, not the economic cycle.
We think Fisher Investments, who will join the NZ Funds Connects call on 16 August, perfectly describe the current environment:
“We have all been through an excruciating 17 months since last February, including a record-fast trip from all-time highs to bear market lows—and back! Some folks’ nerves have likely worn thin. The news flow has felt frantic at times.”
Fisher Investments Founder and Executive Chairman, Ken Fisher, calls the share market “The Great Humiliator,” which used the speed of last year’s market decline to amp up investors’ myopic tendencies. As a result, every wobble feels monumental.
You can see this when so many headlines and articles extrapolate a single day’s decline with a historically insignificant magnitude – like last Monday’s drop, which was the biggest since May 12, itself a date with no notable significance.
We remain positive for the remainder of 2021. More importantly however, if you are investing longer-term to finance your long-term needs such as retirement, then look farther out. Look to the high likelihood that society is even better at living with COVID 12 to 18 months from now than it is today. Look to the low likelihood there is a share market shock lurking. With this mindset, you will be able to conclude, like us, that now is a great time to be invested.
Source: Centers for Disease Control and Prevention (US).
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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