macro kaki: Growth stocks continue to tempt investors

04 Oct 2021

By Mooris Tjioe, Analyst, Phillip Futures

This week in summary

  • Evergrande jitters seem to have faded as foreign investors, state entities buy up debt and struggling entities.
  • Skyrocketing natural gas prices are pushing UK energy companies out of business – leaving 1.7 million customers without an electricity supplier.
  • Stocks fell by the most since March last Tuesday (28th Sept), with 10-Year Treasury yields rising to their highest level in months.

Growth stocks continue to tempt investors

But here’s why value industries could be tasty enough for a nibble right now

Unless you’ve gotten into meme stocks, investing often requires some degree of research. Value investing has long been the benchmark – buying stocks in companies that tend to have stable revenue, dividends, profits, and cash flow.

Finding value stocks is hard work

Value investing often starts with finding stocks with low price-to-earnings (PE) or price-to-book (PB) ratios relative to industry peers. For instance, if we compare General Motor’s (GM) valuations (8.6x PE) to that of Ford Motor’s (9.2x), GM to some may look to be a more attractive buy.

macro kaki: Growth stocks continue to tempt investors



Your discussion would then centre on finding reasons for Ford’s higher valuation than GM

Once you’ve picked out a suitable stock such as GM however, that’s where the real work begins – you might have to analyse the following to get a better picture of the company:

  • Financial statements
  • Earnings guidance
  • Business model and growth prospects
  • Competitor performance
  • Many other metrics!

However, value investing is far from the only viable strategy – and by some measures, is hardly the most popular method of investing for many these days. Just to name a few, momentum, commodities, and growth investing are gaining popularity amongst individual investors, having been brought to prominence over the pandemic thanks to the massive risk-on rally across various asset classes.

Bottom line: Picking value stocks takes effort

Can you really go wrong with growth stocks?

Starting with now-famous names such as Tesla (145x), Square (130x), and MercadoLibre (564x), growth stocks defy traditional valuation methods by growing their business at a faster-than-average pace, gobbling up market share and burning through investor cash at rates that would make the most seasoned spendthrift blush (for instance, Spotify lost around $2.2 million per day in 2020).

Investors accordingly pile into the stock, hoping to justify high stock prices through rapid growth in the business and its profits.

And so far, their faith has been repaid.

From the chart to follow, we can see that growth stocks (orange line) have trampled value stocks (blue line) into the dust with a devastating +1,312% return as compared to the latter’s paltry +407%.

Chart: Bloomberg 30-year % returns on SPX Value and Growth sub-indices
Pictured: Faithful growth investors have reaped returns many times greater than value investors

While growth has always tended to outperform value, the gap between their returns has always been decently narrow – until 2009, when the Federal Reserve embarked on its titanic Asset Purchasing programme to support the economic recovery (more on that in future newsletters).

Value stocks have at the same time, become very cheap

Chart: Bloomberg 25-year chart of SPX Value Index against the Growth Index (as a ratio)

Interpretation:

The chart is a plot of the S&P500 Value Index against the S&P500 Growth Index. A decline in the graph since 2007 shows that value stocks have been underperforming against growth stocks for over the last 14 years (give or take).

There is no doubt: growth stocks have been clearly outperforming value stocks over the past 10 years, with the gap between the two widening particularly after the ’08 crisis and over the COVID-19 pandemic.

This has resulted in the ‘double-bottom’ seen in the lower-right of the above chart, where value stocks reached perhaps its lowest valuation against growth stocks ever.

Simply put, value stocks have never been this cheap.

While a vaccine-led rally for value in end-2020 proved to be short-lived (thanks to surges in the Delta variant), this does show us a glimpse of what a strong post-pandemic rally would look like for value stocks.


Hot off the press

Two value industries worth looking at

No prizes for guessing which two industries

Perhaps the worst-performers over the pandemic have been airline and hotel/hospitality stocks. The recent spread of the Delta variant cut their vaccine-led recovery rallies short in the middle of 2021, but they do still appear to be on a path to recovery.

Chart: Bloomberg 5-year chart of SPX Airline and Hotel Indices against the SPX
Pictured: Airlines and Hotels have broadly lost ground to other kinds of stocks, but appear to be recovering

Interpretation:

The S&P500 Hotels, Resorts, and Cruise Lines Index (S5HOTL) and S&P500 Airlines Index (S5AIRLX) are overlaid against the benchmark S&P500 index.

A decline in the plots shows that airlines and hotels have fallen further than the rest of the Index in general and are now strongly below their pre-pandemic trendlines – although they do appear to have bottomed out and are in the process of recovery.

It is worth noting that while the S&P500 has been trading above pre-pandemic levels for some time now, both the airline and hotel sectors still have not recovered to pre-pandemic proportions against the wider stock market, and are continuing to trade between -10% to -20% lower than pre-pandemic levels.

Both industries have however started to rally in recent days. Since mid-July lows, major airlines such as American Airlines Group (+12.4% since 19th July) and United Airlines (+12.4%) have experienced cautious rallies, while hotel chains such as Marriott International (+15.9%) are again rising as well.

Will airlines and hotels stay beaten down for much longer?


What we’re reading

(with no paywalls!)

  1. Extreme weather in Brazil is threatening emerging markets worldwide
  2. China’s power crunch is causing second thoughts on Chinese investment
  3. Chinese local government debt estimated to be 52% of GDP
  4. How Evergrande may slow China’s real estate machine (and economic growth)
  5. US Consumer confidence falls to 7-month low

Earnings in sight

Tuesday 5 OctPepsiCo IncPre-market
Tuesday 12 OctUnited Airlines Holdings Inc
Fastenal Co
NA
TAS
Wednesday 13 OctBlackRock Inc
JP Morgan Chase & Co
Pre-market
Pre-market
Thursday 14 OctBank of America Merrill Lynch Corp
Walgreens Boots Alliance Inc
Citigroup Inc
Wells Fargo & Co.
Domino’s Pizza Inc
Morgan Stanley
Pre-market
TAS
Pre-market
Pre-market
TAS
Pre-market
Friday 15 OctGoldman Sachs Group IncPre-market

What we offer

1Ford Motor Company(MT5: FORDMOTOR-NYSE)
2General Motors (MT5: GE-NYSE)
3Tesla Inc(MT5: TESLA-NDAQ)
4Square (MT5: SQUARE-NYSE)
5MercadoLibre Inc(MT5: MERCADOLIB-NDAQ)
6American Airlines Inc(MT5: AAL-NDAQ)
7United Airlines Holdings Inc(MT5: UNITEDAIR-NDAQ)
8Marriott International Inc(MT5: MARRIOTINT-NDAQ)

Shares CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allows traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    CFDs typically have flexible and smaller contract sizes. This means that traders will be able to enter into a CFD contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFDs allow traders to perpetually hold the position(s). CFDs are cash settled, no need to worry about the delivery of the underlying asset.
An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

 

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

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