Investing
Our top 5 investment ideas
The clarity provided over the last few days makes us more confident in our optimistic view.
Spotlight
Where do we go from here?
Now that the dust has (mostly) settled on what was a prolonged U.S. presidential election, we have a clearer view of the path ahead. In short, the lack of a “blue wave” means a smaller fiscal stimulus package, keeping inflation and interest rates lower for longer (even should they rise modestly as the cycle advances). Further, the most progressive policies that had the potential to shake up markets, like corporate tax hikes, material changes to labor policy, and aggressive regulatory and anti-trust action seem less likely (yes, there is still a potential for a Democratic majority in the Senate, but it’s more likely to be a “blue ripple” at best). At the same time, Pfizer/BioNTech’s announcement on Monday bolsters our confidence in continuing medical progress against COVID-19.
Heading into Friday, the S&P 500 is up a mere +0.8% on the back of last week’s eye-popping +7.3% rally—but there’s a lot going on underneath the surface. Areas of the market that had the most to gain from “reopening” have led the way, while COVID-winners like big tech and other stay-at-home stars have taken a bit of a breather. Energy (underdog of the year) is poised to have its best week since June, financials popped on the back of a jump in interest rates (the 10-year Treasury yield bounced as much as 16bps to 0.98% at one point), and hard-hit travel and leisure industries like cruise lines, airlines, hotels, casinos, and departments stores all rallied. Overall, the boost to sentiment from less uncertainty is clear. As secular growth like tech and healthcare led the rally from the lows, support from cyclical and value segments of the market now adds to our conviction that the rally can continue as it broadens.
However, this clarity has also come at a cost for those investors that were waiting on the sidelines. While there is still $4.3 trillion dollars of cash in money market funds, the S&P 500 has rallied over +60% since the March lows and +10% since the pre-election lows. Volatility has declined, and U.S. yield spreads have tightened almost back to pre-pandemic levels.
So where do we go from here? We believe we are still early in the global healing process, and both fiscal and monetary support are likely to remain intact. And while risk assets have already staged an impressive rally, we still see opportunities ahead. These are our top 5 ideas right now.
1. Emerging markets: As the global economy continues to recover, now could be the time to invest in EM. A number of emerging economies have done much to adapt to the post-COVID-19 world, utilizing technology to leapfrog to faster growth. This trend is reflected in the investment landscape—consider that the MSCI EM Index now boasts an over 30% weighting to the technology and communication services sectors, compared to just 15% in 2007. At the same time, global demand for technology, strong virus containment, and a weaker outlook for the U.S. dollar could also provide a boost. A Biden administration suggests a more stable path ahead for U.S.-China relations, however given headline risk (such as President Trump’s Executive Order overnight banning Americans to invest in certain companies that help China’s military), our preferred way to gain exposure to the space is through active managers that are able to navigate such developments.
2. Growth and technology: As hard-hit cyclical sectors played catch-up this week, we learned growth stocks could face headwinds as the economy continues to reopen and medical progress towards a vaccine becomes more viable. Nonetheless, our belief in megatrends like digital transformation and healthcare innovation to deliver above-average growth in the years ahead hasn’t wavered. Look at higher valuations with context—lower interest rates and slower macroeconomic growth as a result of more modest fiscal stimulus means that the companies with the best growth profiles will command a premium.
3. Clean energy and sustainability: Governments and companies are growing ever-more focused on the longer-term, particularly as it relates to climate change. The outcome of the election also presents us with an important catalyst for sustainable investments—President-elect Joe Biden has made it clear that the United States will rejoin the Paris Climate Accord, and we expect sustainability and renewable energy to be supported by government policies. But the buck doesn’t stop with politics—renewable energy is growing more cost competitive, and private sector focus on sustainability should continue to grow.
4. Trim some of the outperformers. We admit that a number of asset classes have had a stellar run from the lows. For instance, high yield bonds have generated 20% total returns since the beginning of April. However, spreads are more or less back to their pre-COVID levels—monetary and fiscal stimulus have done much to mitigate the shock of the COVID-19 crisis, and the recent vaccine news has only added to more optimistic sentiment. For those who were in the trade for price appreciation, it may make sense to take some chips off the table and rotate into stocks where upside remains. But for those who are looking for income, high yield still looks attractive compared to risk free yields. Preferred stocks may also be worth another look.
5. Borrow and plan: With interest rates at ultra-low levels, the opportunity cost of holding onto excess cash versus getting invested is significant. Further, low interest rates create an attractive backdrop for borrowing—for a new mortgage or to refinance an existing one, to create an additional source of liquidity, or to fix your existing floating-rate liabilities. Lastly, year-end is right around the corner—consider discussing your options around tax loss harvesting, charitable giving, and annual exclusions with your J.P. Morgan team.
Ultimately, it’s important to keep your goals in mind or some, it may be time to take profits in the outperformers and rotate into areas where we see higher growth potential. And for others, it might make sense to take steps out of cash and into strategies with better yield and return prospects. Lastly, year-end is right around the corner—consider discussing your options around tax loss harvesting, charitable giving, and annual exclusions with your J.P. Morgan team.
All market and economic data as of November 2020 and sourced from Bloomberg and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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- Past performance is not indicative of future results. You may not invest directly in an index.
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- The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
- The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.
- The STOXX Europe 600 Index tracks 600 publicly traded companies based in one of 18 EU countries. The index includes small-cap, medium-cap and large-cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
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