The favorites on the international equity markets are currently "rotating" - that's what Philipp Dobbert, chief economist at quirion, is observing. He explains the trend and how investors at quirion take part in it.
Mr. Dobbert, for years tech stocks have seemed unstoppable in their pursuit of new records. Now there have been several setbacks. So what's going on?
A so-called sector rotation has gotten underway on the international equity markets. It began back in the fourth quarter of 2020 and continued, with minor interruptions, into the first quarter of 2021. We're following this very closely. It's the first time in years that such a shift in which stocks play the favorite role actually seems to be taking hold: away from growth stocks, the growth names, and toward undervalued stocks, the value shares. This can be observed in both developed markets and emerging markets. And it's reflected in an excess return of value indices.
Why this change in favorites right now?
There are two main reasons for the trend. The expectation of an economic turnaround certainly plays a key role. The reasoning: if, for example, the population in the US is largely vaccinated against coronavirus, consumer spending there will take off. That's why cyclical stocks - the ones dependent on the economy - are in demand. This also puts the spotlight on sectors that so far haven't counted among the classic value stocks, such as tourism. Prices in such sectors have a lot of catching up to do. But the pressure on growth stocks like technology shares isn't due to this reason alone. Rising interest rates on the capital markets also play a role. By interest rates on the capital markets we mean the yields on key bonds, above all the ten-year US government bond. These influence the valuation of growth stocks.
And what do government bonds have to do with the valuations of growth stocks?
When I determine the real value of a stock, I usually look at metrics like the price-to-book ratio. But with growth companies it's mainly about the expectation of high earnings in the future. Those, however, usually aren't yet reflected in the books. Now, if high earnings projected into the future are used in the valuation, they have to be discounted in order to translate them into the current value. That's where the market interest rate comes into play: if it rises, I arrive at a lower valuation, without anything having changed fundamentally in the company's business activity. It's simply a question of the valuation model.
quirion pursues a forecast-free investment strategy. So shifts in favorites like these aren't a reason to adjust the portfolios. Do investors at quirion still benefit from them?
Wanting to reliably anticipate future developments is an impossibility in every area of life. The future is and remains unknown - and that goes for value and growth stocks too. Far more effective is a strategic portfolio construction that works well across a wide range of future scenarios. That's why, in our global portfolios, we make a selection from the vast universe of ETFs and, in doing so, also take the factors mentioned into account. But the goal here isn't to be "on the right side." Rather, it's always to cover the market as broadly as possible. So investors in quirion portfolios take part, through their equity allocation, in the current shift in which stocks are the favorites. At the same time, quirion's broad approach also ensures lower risk.
In what way does this approach reduce risk?
We don't just drop a few standard indices into the portfolios. Through the broadest possible positioning and the weighting, we create a balance. Take the example of technology stocks: the "Big Five" - Apple, Microsoft, Amazon, Alphabet (Google) and Facebook - carry a weight of around 50 percent in the NASDAQ 100 and still around 20 percent in the broader S&P 500. When five stocks account for such an immense share of an index's price performance, setbacks in such stocks naturally carry major risks. And we systematically cushion those through the broad positioning of the global portfolios.
Click here to see our investment concept.
