How To Turn Next Year’s Record-Breaking Bullishness To Your Advantage

How To Turn Next Year’s Record-Breaking Bullishness To Your Advantage
Andrew Rummer

about 3 years ago3 mins

Mentioned in story

What’s going on here?

As more and more major banks and brokerages publish their outlooks for next year, a broad pattern of positivity is emerging. Yet the general lack of dissenting voices could create opportunities for Finimizers who disagree with this consensus view – and who are prepared to put their money where their mouth is. 

What does this mean?

Investment management giant Invesco says stocks will do better than bonds in 2021 as economies and company profits get back to growing and central bank stimulus boosts the appeal of riskier bets. 

Investment bank Credit Suisse agrees that supportive government policies leave stock markets looking attractive. Rival Barclays also prefers stocks over bonds: it foresees increases in both companies’ earnings and payouts to shareholders via dividends. 

And then there’s research firm TS Lombard, which says it’s “constructive” on stocks because of, yes, the positive outlook for earnings and the economy – and the “boatloads of cash” coming from central banks. 

You get the picture. 

According to the major investors recently surveyed by Absolute Strategy Research, there’s a 71% chance that global stock markets will rise over the coming 12 months. That’s the highest percentage since they started these surveys, back in 2015. 

ASR asset allocation survey 2021 results

This optimism persists despite history suggesting that current valuations – at least in the US – mean stock market gains may be hard to come by. As the chart below shows, US stocks have only given significant 12-month returns when the average price-to-earnings ratio of an S&P 500 index stock was well below historical norms – except during the dotcom bubble. 

The x-axis shows the “z-score”, or how many “standard deviations” above or below average valuations sit. The S&P 500’s current valuation is more than three standard deviations greater than average.

US stock market returns compared to valuations
Measuring across 7.5 years helps iron out the inconsistencies of economic cycles

And while there’s broad agreement between most professional investors that stocks will do well overall next year – at least compared to bonds – there’s also consensus on what will happen beneath the surface. Investors expect a rotation away from the fast-growing companies that dominated 2020 towards cheaper “value” alternatives. In fact, ASR’s survey found professional investors think the chances of value besting “growth” in 2021 are the highest on record. 

“The vaccine has unlocked this rotation,” TS Lombard writes. “Value has been outperforming growth since the news broke, but there is probably a lot more to come.”

Why should I care?

When it comes to investing, it can pay to pick a minority position – assuming, of course, you turn out to be right. Buying a bargain that others have overlooked could reap handsome returns if and when the winds change. Conversely, even accurate bets that match the consensus view are less likely to result in a bumper payday, since much of the anticipation will already be “priced in”. 

It’s therefore worth taking the time to understand how your vision of the future compares to that favored by the high-rolling investment houses of Wall Street and the City of London. Something to bear in mind as you position your portfolio for 2021...

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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