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Equities have rallied recently on the back of dissipating uncertainty – the US election result becoming final, the announcement of positive news on COVID-19 vaccines – creating a brighter outlook. Following these developments, investors may want to explore underweighted areas that have received less attention this year or those that could see above average growth next year, such as mid caps, emerging Asia and ESG Europe.
Equity markets do not like uncertainty. Thus if we remove two key elements of doubt – the outcome of the US presidential election and the ability to find a successful COVID-19 vaccine – it is no surprise that equities have jumped worldwide alongside a sharp fall in the VIX volatility measure (down 40% since the end of October).
There are of course still unanswered questions around who will control the Senate and when (and how) a vaccine will be available, and Brexit risks loom large. But enough has happened in the past week to warrant thinking about portfolio changes and considering different investment ideas.
We do not believe that the prerequisites for a lasting value rally exist yet, partly based on our view that inflation expectations will not move much higher in the short term. Nevertheless, we do think investors will start to consider where they can redeploy cash or take profit (such as in certain growth areas) in order to add to underweight positions and increase cyclical exposures.
We saw some of these moves in play last week. In terms of performance, sector rotation favoured cyclicals, as well as Energy and Financials, over defensives and Technology-related sectors; high beta and value relatively outperformed low volatility and momentum; and Europe (including UK) saw larger rises than the US.1 Meanwhile, flows were high in regional equities, particularly Europe and, within fixed income, favoured corporate and high yield bonds, again in Europe as well as in emerging markets (see charts below).
Against this backdrop, we see three areas of opportunity for the coming months: mid caps, emerging Asia and Europe ESG.
US mid cap companies have underperformed the S&P 500 this year, through the initial COVID-19 crisis and through recovery when Technology was in favour. However, this trend has recently started to reverse. The reasons we think mid caps (in particular S&P 400) will be looked at again include:
We have seen significant inflows into emerging market Asia ETFs, encouraged by much brighter prospects and improved risk appetite. Despite significant gains for equities in the region already in 2020, the P/E rating (15) is still reasonable.4 Other positive drivers include:
It has been good year for ESG investment in Europe, in terms of flows, relative performance against standard benchmarks and product development. We believe interest in European equities with an ESG angle could be further supported by:
SPDR offers a range of ETFs that allow investors to position for the themes described above. To learn more about these ETFs, and to view full performance histories, please follow the links below:
SPDR S&P 400 U.S. Mid Cap UCITS ETF (SPY4)
SPDR STOXX Europe 600 ESG Screened UCITS ETF (ZPDX)
SPDR MSCI EM Asia UCITS ETF (EMAD)