,In buoyant mood: A specialist works at his post on the New York Stock Exchange. Despite the bouts of volatility, global stock markets have continued to power ahead in recent months, with cyclical counters driving the rally. ─ AP
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THE arrival of Covid-19 vaccines since late last year has unleashed bulls in equity markets, as optimism about economic recovery boosts risk sentiment.
Despite the bouts of volatility, global stock markets have continued to power ahead in recent months, with cyclical counters driving the rally.
This trend will likely continue in the months ahead, as rising vaccination rates and the declining cases of Covid-19 help improve the prospects of further reopening the economies.
While most markets have already priced in the expected economic recovery, one analyst tells StarBizWeek that there is still room for rotation into growth and value stocks.
“I think this trend applies to most major equity markets. There will certainly be some volatility and corrections along the way, as some investors are still sensitive to unfavourable news, but overall, the mood remains positive, ” the analyst with a local brokerage says.
“Having said that, it is also true that many stocks have run ahead of their valuations. So we still advise investors to be selective, and look at valuations to determine potential upside, ” he adds.
According to Schroder Investment Management (Schroders) head of research, QEP global equities, David Philpotts, valuations are the best long-run predictor of returns.
Noting that although the good economic news has already been priced in, Philpotts says equity markets may well continue to benefit from the tailwind of ongoing financial stimulus.
However, they also face three headwinds: high valuations, lack of room for interest rates to fall significantly, and high government debt burdens.
“Ultimately, valuations are the best long-run predictor of returns. With many stocks and most major equity indices close to their all-time highs, they are naturally more vulnerable to any adverse news flows, ” Philpotts explains.
While growth stocks are companies with the potential to outperform the overall market over time because of their future potential, value stocks are companies that are currently trading below what they are worth.
Value and bubble
As the global economy emerges from the pandemic, he reckons, one of the potential themes that could emerge in the months and years to come is that there is still significant opportunity for value stocks to rebound.
“The market has, for an unusually prolonged period, failed to discriminate between cheap quality stocks with superior fundamentals and those which are truly facing cyclical or structural headwinds to their business models, ” he says.
“By early November 2020, the degree of valuation dispersion across the market had reached the extreme levels observed during the last big tech bubble of 1999-2000. The welcome news of vaccines and the fading of US political uncertainty appear to have been the catalysts for a change in market leadership.