A Rotation Away From Tech Stocks And Gold?

A Rotation Away From Tech Stocks And Gold?

over 3 years ago3 mins

Mentioned in story

For the last few months, investors have been piling into tech stocks and, more recently, gold. But a rotation away from these assets is afoot, and some investors may be caught off guard.

⏰ Recap

  • Stocks have been on a tear since March, led by the US’s biggest tech companies
  • And the likes of Apple, Amazon, and Facebook appeared to justify their rises, largely beating investors’ earnings expectations last month
  • Major oil companies, on the other hand, reported historic losses
  • Investors – apparently unsure what would happen next – bought up gold, and its price hit a record high

✍️ Connecting The Dots

The pandemic has left investors trying to achieve two often-opposing goals: relative safety and a high-enough yield – or return – on their investments. As far as the former goes, “safe haven” gold is a good bet: it doesn’t pay a dividend or interest, but given how low the safest government bonds’ yields currently are, investors aren’t actually missing out on that much income. And when it comes to returns, big US tech stocks – several which have benefited from global lockdowns – have been the stars of the show, seeing their share prices rise.

But nothing lasts forever, and Goldman Sachs argued earlier this month that investors might actually ditch those assets when a vaccine eliminates coronavirus worries. In gold’s case, a vaccine that drives economic growth, inflation, and, eventually, a rise in interest rates will encourage investors to look for assets that actually pay them something. And in tech’s case, those stocks will be upstaged by “cyclical” stocks that stand to benefit more from an economic recovery.

And that happened last week – sort of. Investors initially rotated towards cyclical and “value” stocks – those that appear cheap when compared to the company’s earnings – and ditched tech and gold in the process. But they went back and forth, as their desire to rotate seemed to ebb and flow with news of vaccine progress, trade war tensions, and the likelihood of further economic support from major governments.

🥡 Takeaways

Some investors may have been reluctant to adjust their positions based on a rotation that might never happen, and so might’ve found hedging their bets using options useful. For a small upfront fee, you can purchase the right to buy or sell stocks at a pre-agreed cost when they hit a certain “strike” price. So you could buy a “call” (i.e. the right to buy stocks) with a higher strike price than currently, as well as a separate “put” (i.e. the right to sell) at a lower strike price than currently. And if used appropriately on groups of stocks – like value or “growth” – you’d be able to benefit whether or not there is a full rotation.

According to recent analysis by Goldman Sachs, there may still be an untapped opportunity in European cyclical stocks: their collective performance hasn’t caught up with the uptick in both earnings sentiment (second-quarter results have, on average, been better than average) or with improving manufacturing survey data. That’s likely down to lingering uncertainty over the recovery in consumer data – but if that picks up too, European cyclical stocks could rise rapidly.

🎯 Also On Our Radar

Telecoms giant Liberty Global announced last week it had agreed to buy Swiss telecoms firm Sunrise for $7 billion. The two had previously agreed a merger that was ultimately blocked by shareholders, but Liberty pressed on and will instead take full control. Being big in the telecoms industry is important: the more revenue Liberty can generate against its high-but-largely-fixed costs, the more profitable it could become.

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