By Bill Studebaker, CIO & President, ROBO Global
In normal times, Black Friday kicks off the final stretch into the end-of-year holidays. But, of course, 2020 is anything but normal. As we approach the last weeks of a year most of us would like to forget, December—which is usually filled with holiday shopping, holiday parties, and family—is occupied primarily with searching for some light at the end of this very long tunnel. Happily, the glimmer we’re beginning to see is no mirage.
With promising news hinting at the rapid approval of multiple COVID-19 vaccines, as well as a task force that is working diligently to prepare for a quick, tiered rollout of vaccinations as soon as they become available, the virus may finally meet its demise. Other good news includes the expected appointment of Janet Yellen as the new Treasury Secretary, and Trump’s agreement to support a peaceful transfer of power if and when the Electoral College confirms Joe Biden as the 46th President of the United States. Add the news that China is showing strong evidence of broad economic recovery, and it seems there is another catalyst to propel global markets higher at every turn.
Is it really going to be this easy?
The numbers seem to be saying yes. For the month of November, the ROBO Index gained +16.8%, and the THNQ Index advanced +15.9%, while the ACWI Index rallied +12.3%. Late in the month, the Dow hit a new all-time high, breaking the 30,000 mark for the first time in history, and both the S&P 500 and Nasdaq broke their own records on the first day of December.
Investors are benefitting, but they are still struggling to navigate the future by changing what has already worked. But at 22x EPS on the S&P 500, are we going to hit a wall? It’s a reality that begs the million-dollar question: what should investors buy today to prepare for what lies ahead?
We have been advocating all year that one of the wisest moves in this environment is to invest in robotics, artificial intelligence, and healthcare innovation. These important technologies are already driving exponential change to our lives and our portfolios, and there is every reason to expect this speed of change to continue. Despite the sharp rally in Value in recent weeks, in a longer-term context, Value still looks very depressed—a fact that is likely to provide a strong tailwind to many capital-intensive industries within robotics. A shift towards a more active fiscal policy, lower valuations of Value, and more persistent underperformance from Value in recent years all point to an even better environment for Value than we saw in 2009 when it rallied 24% relative to growth, rising $6M from the trough.
Global data continues to demonstrate growing strength in manufacturing, with a slightly mixed picture on the consumer side. While US PMIs continued to accelerate, Eurozone PMIs beat on subdued expectations. The US manufacturing sector continues to tick along at a healthy pace, highlighted by the strong sprint in October durable goods orders. Secular growth also continued to hang in there, thanks to what seems to be an inevitable return to normal in 2021 (though keep in mind that this cohort already had plenty of alpha in the tank going into Q4). On the flip side, the value/cyclical group, once left for dead, has been happily resurrected thanks to a vaccine that could quickly catapult this group back to pre-COVID highs.
Heading into the new year, we believe small/mid-caps vs. large-caps, and cyclicals vs. defensives are the place to be, and our indices provide this critical exposure. We also believe the healthcare sector is particularly well positioned given its GARP-y nature and re-rating potential as political overhangs dissipate. In considering potential tailwinds into 2021, the re-initiation of corporate buybacks comes immediately to mind; the sharp drop in buyback activity that began in 2Q20 has been widely observed throughout the year, as hundreds of companies suspended their buyback plans amid a pandemic-triggered economic crisis and crunch for cash. Moving forward, the reinstatement of buyback plans is a theme worth noting, as indicated by several management teams during the 3Q earnings season.
Happy holidays, happy investing, and cheers to the year ahead!