2021 Halftime Report

2021 is officially half over, and if you are at a loss for how to describe it, you probably aren’t alone. In one sense, a lot has happened. The events in America’s capitol on 6 January, Brexit, the Suez blockage, the wild ride of GameStop and other so-called meme shares, family investment office Archegos’ collapse, cryptocurrencies’ wild ride, all things dogecoin, COVID’s delta variant, the Indian tragedy, new lockdowns in Australia, sabre-rattling in the Taiwan Strait and South China Sea, Middle Eastern conflict, you name it. But markets have seemingly told a different story, extending one of the longest quiet periods in recent memory. Day-to-day volatility is low.^[i] As many outlets have noted, US shares have now gone without a -5% drop since last autumn.^[ii] That might be why headlines have seemingly hyped every little wiggle along the way to global equity markets’ 11.9% first-half return, which we think illustrates the myopia seemingly plaguing the investment world right now.^[iii]

One of what we consider Q2’s more interesting developments didn’t receive much attention from financial commentators we follow: Growth shares trounced value, 10.7% to 4.6%.^[iv] Growth-orientated companies generally have higher valuation metrics like price-to-earnings ratios and focus on re-investing profits into the core business to expand over time, making their profits relatively less sensitive to economic growth rates. By contrast, value-orientated companies, which dominate UK markets, tend to carry relatively lower price-to-earnings ratios and more debt, making them more sensitive to economic conditions, and they tend to return more money to shareholders via dividends and share buybacks and invest less in growth-orientated endeavours.^[v] Growth shares have led cumulatively since the recovery from last year’s downturn began on 16 March 2020.^[vi] But value has had bursts of leadership, including an attention-grabbing run earlier this year. Yet since that value countertrend’s zenith on 13 May, growth jumped 11.1% while value managed to rise just 1.7%.^[vii] Yet, strangely, most commentators we follow act like value remains on some huge tear whilst growth is stuck at the starting line with a sprained ankle. Consider this as Exhibit 22,567,938 in the wealth of evidence we have shared with readers over time suggesting that letting headlines drive your investment decisions likely isn’t a winning move. Sometimes, in our view, they are myopic and sensationalised. Other times, our research indicates they are dead wrong.

With growth shares, leading in Q2, growth-heavy sectors did a lot of the heavy lifting. Tech was the best performer at 11.4%, bringing it in line with the world year to date.^[viii] Communication Services, home to many Tech-like firms, also outperformed at 9.1%.^[ix] But Energy defied the trend, as oil market fundamentals seemingly outweighed stylistic factors. It kept outperforming and remains the market’s top sector year to date.^[x] We think this is likely to prove fleeting, as the reopening demand mini-boom appears likely to run out of steam sooner rather than later and oil producers worldwide still have plenty of spare capacity.^[xi] Based on our research, supply and demand appear likely to balance out before long, which we think in turn is likely to put a lid on oil prices and cool earnings growth for that sector.

As for geographic trends, Canada’s high Energy weighting—and its heavily Energy-exposed Financials sector—boosted returns in Q2, helping it clock in at 9.9%.^[xii] The US wasn’t far behind at 8.7%, helped a great deal by huge Tech and Tech-like shares.^[xiii] UK shares slowed down, rising 5.8% in Q2, and are now trailing the world year to date by a bit.^[xiv] Some may pin that on Brexit, but that ignores the country’s lockdowns lasting much longer than the rest of the Western world, which we think weighed on sentiment. Furthermore, the country’s heavy value tilt was a big Q2 headwind.^[xv]

Q2’s main geographic weak spot was the Asia/Pacific region. New Zealand fell again, bringing year-to-date returns to a not-so-hot -16.1%.^[xvi] Japan was slightly negative as its slow vaccination rollout and COVID flareups appeared to weigh on sentiment, whilst Singapore eked out 0.3% as a fresh COVID outbreak upended its travel bubble with Hong Kong and its value orientation weighed.^[xvii] The latter did a little better but still trailed global shares badly, rising just 2.4% as investors continued grappling with mounting political uncertainty.^[xviii]

Overall, we think Q2’s main theme is simple: In our view, global equity markets continue behaving as our research indicates they normally would in a late-stage bull market, which we think makes sense. (A bull market is a long period of generally rising equity markets). In our view, last year’s downturn and economic contraction didn’t last long enough to fully reset the market cycle, which we think is why growth has beaten value cumulatively since the recovery began in March 2020.^[xix] That leadership has endured despite several head fakes along the way, and we think it is likely to keep doing so through the rest of this bull market. We encourage readers to keep that in mind as headlines keep touting the proverbial next big thing in niche corners of the market or hot IPOs. Those are usually more value orientated and overhyped, with their allegedly hot stories probably reflected in market prices by the time you hear about them. In our view, this is a time to avoid that greedy temptation and stick with big boring growth shares. We think their Q2 leadership is likely a down payment on more to come.