Wednesday, Dec 3

The great equity rotation is not going to lift all ships, as Harlyn Research pointed out in a note we featured in yesterday’s briefing. This is further affirmed today by equity strategists at Jefferies who explain why the US tech sector may be approaching the limits of sustainable valuations. In other highlights, Ned Davis Research highlights three indicators that could signal a more cautious outlook for European equities, while Liberum discuss the perennial question of whether investors should pay any attention to analysts’ equity recommendations. It’s a question that divides opinion, so some robust academic research seeks to get to the bottom of it, and Liberum breaks down the findings of that research here, Elsewhere, Eurasia Group ponders the latest developments in Washington as the US lurches towards a fresh fiscal stimulus package and JP Morgan looks at whether potential 2021 bond demand and supply predictions match up to the consensus expectations for higher yields. In today’s ESG segment, JPMorgan charts the remarkable rise in ESG investing seen since the pandemic struck.   
  1. equity rotation Tech stocks Jefferies

    1. US technology – sentiment heating up

    While global stock markets climb amid growing optimism surrounding an economic recovery Sean Darby at Jefferies says investors should be aware that in the short-term the US IT sector has become crowded and so he has tactically lowered his rating to moderately bearish. On a micro basis, he explains earnings revisions for stocks in Jefferies’ US IT index – which excludes the heavyweight FAANG+ stocks – have continued to climb, helped by a weaker dollar, while free cash flow has surged. However, Darby says forward valuations have hit a ceiling, and this has coincided with long-end Treasury yields reawakening from their slumber. As the US economic cycle broadens out, the IT sector may struggle relative to other groups, he warns, and with sentiment towards the IT sector surging to insatiable levels along with risk appetite, some caution is warranted
  2. European equities Relative value Ned Davis Research

    2. Will European equities move higher?

    Mark Phillips at Ned Davis Research has reviewed his trend, rally watch, and sentiment indicators to gain perspective on the outlook for the European equity market. He says technical indicators signal that European stocks are likely to move higher in the coming months, and while European sentiment has improved significantly from a month ago, it is not signalling the extreme complacency associated with heightened downside risk, as was the case in March 2002. Philips highlights three indicators which could potentially signal a more cautious outlook on European equities, however.
  3. analyst recommendations Equities Liberum

    3. Maybe analyst recommendations DO add value

    The received wisdom that following analyst recommendations does not on average add value to an investor’s portfolio may need revising, says Joachim Klement at Liberum . He points to a new study that shows in fact it is just US analysts that are on average relatively useless, and that if the rest of the world is factored in, the picture changes significantly. Simply put, US analysts are outliers, with a penchant for glamour and growth stocks, and in every other developed country and almost all emerging markets, analyst recommendations create meaningful outperformance over time, notes Klement. Furthermore, and perhaps unsurprisingly, he says those recommendations add more performance in a bear market than when sentiment is positive. The big question is whether analysts are more able to pick through the rubble of a crisis and select the truly good stocks, or whether investors are more likely to follow their lead when panic trikes?
  4. US fiscal stimulus Eurasia Group

    4. Bipartisan stimulus proposal amid Covid-19 surge raises odds of a December deal

    Jon Lieber at Eurasia group has given his take on news that a small bipartisan group of Senators has joined with the larger Problem Solvers Caucus in the US House to endorse a $900 billion “targeted” fiscal stimulus approach and encourage its passage into law. Bipartisan “gangs” of Senators are a time-honoured tradition in the US Senate at times of impasse, he explains, and the main effect of the proposal is to undermine Democrats insisting on a $2 trillion deal. There is, says Lieber, now clear bipartisan support, and likely majorities in both houses, for something smaller, and the current dynamics make action in December more likely. President- elect Biden, and how he uses his new stature, remains the key factor for investors to watch, he says.
  5. bond supply bond yields ESG Government bonds JPMorgan

    5. Bond supply and demand for 2021, ESG booms

    A consensus view that has emerged in recent weeks as investors and analysts ponder their 2021 outlook is for a rise in bond yields as economic growth improves next year, says Nikolaos Panigirtzoglou at JP Morgan. To find whether this view matches his own supply and demand estimates, he has revised his market analysis to incorporate updated analysis for the balance of 2020 as well as for 2021. For 2021, he sees bond supply declining by just over $1trillion, largely due to a decline in spread product supply , and in particular an effective halving of net issuance in US HG corporate bonds. Meanwhile, Panigirtzoglou projects a near $1.7trillion deterioration in global bond demand in 2021, mostly due to G4 central banks reducing their bond purchases. This, he says, implies around $600billion deterioration in the global supply/demand balance for 2021 which in turn points to modest 20bp upward pressure in bond yields, effectively reversing a third of this year’s decline. In the second part of the note Panigirtzoglou focuses on ESG, highlighting the pace of ESG investment adoption in 2020, which he says has been remarkable, doubling in size and obviously helped by the pandemic. The note delves into the universe of some 4,000 ESG related funds, which in notional terms stands at an AUM of $1.8trillion, although Panigirtzoglou concedes these AUM changes reflect to some extent market performance rather than the pace of ESG adoption. Across regions, the US has seen the biggest adoption increase, with passive ESG funds seeing stronger growth than active ones, he says. Fixed Income and Multi Asset ESG funds have failed to outperform equity only ESG funds, adds Panigirtzoglou, either in terms of AUM or flows.