More and more experts are saying BUY NOW
May 19, 2022
This week's midweek commentary is titled:
'Time To Buy?'
Valuations in the UK and Europe are beginning to look low. Our belief at The Portfolio Platform is backed up by Peter Oppenheimer of Goldman Sachs and JP Morgan’s Marko Kolanovic.
Oppenheimer said last week that 6-to-12-month valuations are now looking attractive. Positions by our traders on TPP are certainly in agreement with this. There is a strong core ‘long equity’ position right now.
Nobody is saying it will happen today, tomorrow, this month or the next. BUT, the mid-term view is that this is a good opportunity. The UK is trading at about 10.5 x earnings and the indices in Europe around 12x earnings.
Yesterday the S&P500 forward 12-month p/e ratio dropped below its 25-year average having surpassed the 10-year average last week. This represents a great buying opportunity as stocks are, quite literally, good value compared to earnings.
The rout in global equity markets that erased $11 trillion since the end of March may be reaching a floor for now as battered valuations, particularly among tech stocks, attract dip buyers. More has been taken out of the market than is accounted for in the entire US quantitative easing process ($9trillion).
For some, the argument rests on technical indicators, while others are looking at what corporates are offering, such as strong balance sheets and high dividend yields. Plus, investors have already priced in a lot of concerns, according to Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc., including about inflation and growth, central bank policy tightening and the war in Ukraine.
“Equities are starting to look attractive for medium-to-longer term buyers,” he told Bloomberg Television last week. While the downside risks still lurk, “all of that really is absorbed into the market already.”
Stocks are getting notably cheaper, as earnings growth forecasts continue to be steady, while prices have plunged. Europe’s Stoxx 600 is now trading at 12 times its forward earnings, below its average forward price-to-earnings ratio of 13.2 since 2005. It’s suffered a 22% de-rating this year, a similar valuation drop to the S&P 500.
“We have seen quite a big correction now,” Oppenheimer said. “There are inevitably times when you are going to get some of the setback rebounding.”
Oppenheimer is not alone in seeing a floor. JPMorgan Chase & Co.’s Marko Kolanovic repeated his dip-buying calls last Monday, urging investors to add risk as central bank hawkishness has reached its peak. Still, the problem is that such calls by die-hard bulls have failed investors before.
Back in mid-April, Kolanovic said sentiment and positioning are too bearish, and advised investors to buy growth stocks including tech, biotech and innovation, alongside value stocks like metals and mining. The Nasdaq 100 index has ended every single week since then in the red.
Traders are caught between stubbornly high inflation that erodes asset values and central-bank tightening that threatens to slow economic growth, or even push some nations into recession.
“For now, investors need to be prepared for continued volatility,” Solita Marcelli, Americas chief investment officer at UBS Global Wealth Management, wrote in a note. She added “sentiment is bearish” but not capitulating.
One fund that has seen huge inflows in recent weeks is Ark Invest. Investors can't seem to get enough of their flagship ETF based on year-to-date net inflows of $1.3 billion through Monday last week, according to data from Bloomberg.
That's in spite of the fact that the Ark Invest Disruptive Innovation ETF has sold off 75% from its record high and is down 58% year-to-date.
The ETF was down another 5% in last week and fell below $40 for the first time since April 2020 as investors continue to worry about rising interest rates, higher inflation, and the potential for an economic recession.
The weakness in Ark's flagship ETF puts its assets under management well below its record of $28 billion reached in 2021. The ETF currently has $8.8 billion in assets under management, according to data from Koyfin.
This is the perfect example of people looking to buy in at a discount. It’s not always the best investment strategy, but at the moment, the figures are starting to suggest that now is indeed the time.
Investors have dumped growth stocks in recent months. Let’s be honest, they were too high. Those of us who moved out of US growth stocks have been saying that for some time, but still they went up fuelled by the stay-at-home investor. Unfortunately, retail traders are now net down over the last 2.5 years meaning any gains made since the pandemic crash, have been taken back by a cruel market.
The iShares Russell 2000 Growth exchange-traded fund, which tracks an index of small-cap growth stocks, has lost about a quarter of its value this year.
The main factor driving the lack of interest in growth stocks has been Federal Reserve policy. The central bank, as part of its effort to tackle high inflation, is expected to soon reduce its bond holdings, which has spurred a selloff in Treasury bonds, causing their yields to soar. Higher long-dated bond yields make future profits less valuable—and fast-growing companies are usually valued on the assumption that the bulk of their profits will come many years in the future.
That means the recently small inflow to growth funds could be interpreted as a step in the right direction. The past week has seen a net inflow of $130 million to U.S. small-cap growth ETFs. About $30 million moved into the iShares Russell 2000 Growth ETF alone.
With people allocating more money to the group of stocks at their current low levels, it could be a sign that these stocks have bottomed. “You have enough to say you could have a short-term low from last week,” said Keith Lerner, co-chief investment officer at Truist.
Also on board with the idea that stocks are currently at a great buying level is billionaire investor Warren Buffett. He has used the ongoing market selloff as an opportunity to buy the dip and add several new major positions as his investing conglomerate, Berkshire Hathaway, deployed tens of billions of dollars into stocks (around $51bn) during the first quarter, according to new regulatory filings.
Buffett’s Berkshire Hathaway took advantage of the ongoing market turbulence to enter into eight new positions and add to many others during the first quarter of 2022, with most of its buying activity occurring in early March.
Buffett’s investing conglomerate disclosed several new stakes late on Monday, including 55 million shares of Citigroup (worth around $2.6 billion) and 69 million shares of media giant Paramount Global (worth around $1.9 billion).
Berkshire Hathaway also made sizable purchases in two energy companies—Chevron and Occidental Petroleum, legacy tech giant HP and video game company Activision Blizzard.
Buffett has always believed that ignoring the noise around the market is important and when opportunities come along, and the market falls, it’s time to invest.
Eventually, the markets will recover and the gains on his purchases will be worth billions and the investing world will no doubt wonder how he does it.
It might be hard to see it right now, consumer confidence is low, investors are scared, but more often than not, that IS the time to invest. By the time the conflict is over, oil is lower, inflation is down, the markets won’t be where they are now, they’ll be higher. By then, it’s too late.
It doesn’t always seem obvious to the retail investor, but it’s better to buy when things are discounted than when they look expensive. If you’ve missed the drop, well done, but it only counts as a win if you then buy in again and enjoy the ride back up.
If you would like to build a TPP portfolio, or if you would just like more information, please get in touch with our team here. As well as strategies that will aim to take advantage of a discounted market as it reverses, we also have a selection of 'buy and flat' strategies that often miss the retracements.
Schedule a call with our team to discuss your options.You can do so here.
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