Dubai: After stock markets had finished 2020 by adding to gains they had already made during the height of the pandemic, positive news on COVID-19 vaccines helped lift markets in the latest quarter.
Among key benchmark share market indices, that are tracked by stocks worldwide, the MSCI World Index was up 10 per cent, the S&P 500 up 12.69 per cent and the stock of the year, Tesla, up 64 per cent.
Relief about the start of vaccination rollouts, though, was quickly met with news of a variant strain of the coronavirus that led to lockdowns in countries including the UK, Germany and China. However, new infections have reduced since then in these countries and rattled sentiments have eased.
Money managers are seeing pockets of opportunity with investments ranging from high-yield bond funds to equities in Japan and Vietnam. For those who want to use exchange-traded funds to invest in these ideas, analysts suggest funds that can serve as good investments, which we will elaborate further below.
The topic we explore first is if Dh10,000 was available for investing, what creative ways would money managers try to put that money to work, beyond traditional stock market investments?
Note: Before committing money to stock markets, be sure you’ve stocked up on emergency savings – ideally, at least six months’ worth of expenses. If you’ve managed that, you’ve built a good margin of safety.
Below are recommendations from a number of global funds, namely, BlackRock Global Allocation Fund, Causeway Capital Management, William Blair Macro Allocation Fund, Absolute Strategy Research and Sierra Mutual Funds.
Buy the new leaders
Investors base their investment decisions on two big questions in 2021: Will the global economy continue to recover, and has the market rally gone too far up?
The general view is that a strong economy will lead to further market gains, albeit with different set of stocks playing a dominant role each time. Given this dynamic, analysts recommend looking for market segments that trailed last year but will benefit from an accelerating economy. This leads many to favour industrials.
Starting with the broader economy, while the near-term trajectory of the virus is a real risk, growth should accelerate thanks to the worldwide vaccine rollout, massive stimulus, bottomed-out interest rates and strong demand from consumers.
In the US, analysts are widely of the opinion that the US consumer sector is in surprisingly good shape. While unemployment is elevated, jobs are returning. Household sector are further supported by manageable debt levels, record-low debt servicing costs and the highest savings rate seen since the early ’70s, according to research.
US household demand, particularly for durable goods, has supported manufacturing. Analysts add that combination of low inventory levels and higher spending should continue to support the manufacturing sector.
How to play it with ETFs: Invesco DWA Industrials Momentum ETF (PRN) gets the nod from analysts as the fund posted a gain that topped 33 per cent in 2020, which outpaced the broader sector by more than 18 per cent.
The fund holds at least 30 securities that exhibit the best relative strength from the benchmark, rebalancing quarterly. The $190 million (Dh697 million) fund has an expense ratio of 0.60 per cent. Also, the Invesco Dynamic Semiconductors ETF (PSI), had a 31.8 per cent gain in the fourth quarter.
Experts eye renewable energy sector
Renewable energy and ‘net-zero’ carbon-emissions goals have become the norm with the European Union, the UK, Japan and South Korea targeting 2050, while China is aiming for 2060. The US recently announced a similar net-zero goal for 2050.
Analysis show that the subsidies and investment spending needed to achieve this global energy transition could add up to trillions of dollars. And with more production, renewables such as solar and wind have reached cost parity with fossil fuels, no longer needing help from subsidies.
However, many companies that stand to benefit from this trend have seen their share prices already reflect this bullishness. Yet some bargains remain, such as the European power utilities that are rapidly transitioning to solar, wind, hydro, geothermal and other renewable-energy sources.
The better-capitalised integrated oil and gas majors may also benefit, since they have the cash flow and technological capabilities to diversify their portfolios away from fossil fuels.
How to play it with ETFs: Analysts point to the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID). The fund hasn’t appreciated as much as iShares’ Global Clean Energy ETF (ICLN), whose solar-power producing constituents have soared.
GRID holds companies in the smart-grid and electrical-energy infrastructure sector, including storage for clean-energy alternatives. It has tiered weighting, with 80 per cent of holdings in pure-play (companies whose businesses are focussed on this trend) firms. The $176.5 million (Dh648.32 million) fund has an expense ratio of 0.70 per cent. Also, the iShares MSCI Europe Financials ETF (EUFN), rose 27.6 per cent in 2020’s fourth quarter.
New market trends point to Vietnam
Vietnam is among the more attractive equity markets as investors exit the pandemic-ridden year of 2020 and entered 2021 hopeful that the worst is past. Although the pandemic still ravages on in some parts of the world, looking at it from a global economic and market standpoint, with the larger developed economies mostly on the recovery path, analysts view that markets will only gain henceforth.
The country continues to deliver among the highest GDP outcomes, with the most recent growth estimates at 3 per cent for 2020 and 7-8 per cent for 2021. This growth has been underpinned both by favourable domestic drivers such as demographics, consumption and infrastructure as well as a steady improvement in economic freedom and policy variables.
As a participant in major regional trade deals, the economy has strengthened. In addition, in 2020 policymakers agreed to, and began implementing the EU-Vietnam free trade agreement. And while far from unscathed during COVID-19, experts evaluate that Vietnam has demonstrated an ability to weather and navigate the pandemic’s challenges relatively efficiently.
Investors can obtain broad exposure through locally based and managed funds trading on the London Stock Exchange such as Vietnam Enterprise Investments Ltd. (VEIL.LN) or VinaCapital Vietnam Opportunity Fund Ltd. (VOF.LN). The sole US ETF is the VanEck Vectors Vietnam ETF (VNM; not to be confused with one of Vietnam’s larger companies, Vinamilk)
In the broadest terms, fundamental analysis involves looking at any data which is expected to impact the price or perceived value of a stock. This is, of course, anything aside from the trading patterns of the stock itself, As the name implies, it means getting down to basics.
How to play it with ETFs: VanEck Vectors Vietnam ETF (VNM) tracks the country’s listed equity market. The largest sectors are real estate (25 per cent), food (14 per cent) and electronics (14 per cent). The expense ratio is 0.64 per cent. Also, the VanEck Vectors ChinaAMC China Bond ETF (CBON) gained 4.8 per cent for the quarter.
Analysts call for caution on technology stocks, but favour Japan
The strong way that markets finished 2020 suggests that a lot of the good news for the year ahead has already been factored in — confirmed by the almost uniform optimism found in most investor surveys.
It would be easy to follow the crowd and recommend equities or Bitcoin. But the current optimism has pushed valuations for global stocks to levels higher than those seen at the peak of the tech bubble in January 2000.
These valuations are often justified by interest rates close to zero in most economies. Analysts opine that justifying extreme valuations in stocks with extreme valuations in bonds highlights the fragility of market conditions. Any change in the balance between activity and inflation could challenge these valuations in 2021.
With some European and Western economies seeing a brief “double-dip” recession, Asia looks well placed to gain from any such economic uncertainty and analysts widely see Japan as a better way of playing this than emerging-markets equities, which look expensive.
A brief economic downturn might see some of the cyclical sectors that performed well last quarter — such as autos, industrials and basic materials — give back some gains, with investors likely to buy cheaper defensive sectors such as health care, food producers and personal goods.
Analysts further evaluate that tech is over-valued and subject to regulatory and tax-related risks. Looking forward by 12 months the caution that is widely seen with technology stocks prompts favouring value stocks over growth, and analysts add that any short-term economic weakness should be seen as an opportunity to make that switch.
A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle.
Value stocks are publicly traded companies trading for relatively cheap valuations relative to their earnings and long-term growth potential. Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average.
How to play it with ETFs: Analysts say the JPMorgan BetaBuilders Japan ETF (BBJP) is one way to add passive exposure to the Japan’s stock market. The expense ratio of 0.19 per cent is 30 basis points less than that of the iShares MSCI Japan ETF (EWJ). Also, the Industrial Select Sector SPDR Fund (XLI) rose 15.5 per cent in 2020’s final quarter.