Investment themes for the second half of 2021

With the first half of 2021 now on its side, I thought it might be a good idea to take a look at a few general themes that were discussed as we made our way into 2021, and more specifically, to assess whether certain adjustments may have to be considered.

1. The USA may fall behind in 2021

Most experts believed that US companies could possibly fall behind their international peers. This view was based largely on the fact that the US (S&P500) was trading at valuations that were not only considered to be too expensive, but also at levels that were not seen in decades. Let’s use the cyclically-adjusted price earnings (CAPE) ratio for the S&P500 as an example. Up until the end of June 2021, the ratio of US companies increased from end-of-2020 levels of around 35.5 times to current levels of around 38.5 times – the highest levels seen since January 2001. When we take a look at the subsequent five-year growth levels (or rather, the lack thereof) on specifically the S&P500, you should probably still be wary of current valuations.

Graph 1: CAPE ratio – USA and European companies (source: Barclays Research)

This growth, however, was the result of good earnings growth. With the second quarter results that will be released soon, it is expected (according to FactSet) that the earnings growth for Q2 will come in at around 64% year-on-year. If this is correct, it will be the highest year-on-year growth seen in more than 10 years.

Table 1: S&P500 quarterly earnings growth: estimated growth vs. actual growth (source: FactSet)

Back to the valuations. The S&P500 remains extremely highly priced, which not only means that the US cannot afford to get this wrong, but more importantly, that this type of growth will have to be sustained.

2. US inflation may be higher than expected

On previous occasions where the US found themselves in such an excessive money printing program, higher inflation used to be a consequence. Concerns were therefore justified at the end of 2020 that higher inflation may yet again be a consequence for the US, and that this pressure may potentially lead to sooner-than-expected interest rate hikes. The FED was not as concerned and felt that everything was under control. At the end of 2020 the International Monetary Fund (IMF) released their expected inflation figures for 2021, and it appeared as though they agreed, indicating an expected average inflation growth of 2.765%, and year-end growth of 2.21%. If you were concerned about inflation at the beginning of the year, your concerns most likely worsened after the release of the most recent (June 2021) US year-on-year inflation growth figures, which showed an increase of 5.4%. This brings the average US inflation growth rate to 3.4% for the first six months of 2021.

Graph 2: Precious metals vs. US inflation (source: @SchalkLouw & Refinitiv Eikon)

It’s not difficult to understand why there was a renewed interest in precious metals during the past two weeks. But the question persists – will they get inflation under control, or will this higher inflation theme remain a theme that will have to be monitored closely?

3. The return of Value

You will see that although international value shares started to make a comeback between January and May this year, this trend now seems to have lost some steam. However, you will see that when we place the MSCI All Country World Value Index relative to the MSCI All Country World Index (ACWI), there is a fairly strong link with the ACWI excluding US companies relative to the ACWI. You don’t have to search too far beyond abovementioned point 1 (strong S&P500 earnings growth) to find a reason why value shares simply cannot seem to keep their place in the spotlight.

Graph 3: MSCI All Country World Value Index relative to MSCI All Country World Index (ACWI), vs. ACWI excluding US companies relative to ACWI (source: @SchalkLouw & Refinitiv Eikon)

Adding to point 1 above, if your opinion is that US earnings growth may start to decline at some point, this is definitely a theme to keep in mind. Value shares also have a tendency to be more cyclical in nature and they usually include energy, financial and resource shares. If you still believe that we haven’t seen the end of the resources upswing, I wouldn’t be too quick to push value shares aside just yet.

Finally, you can also include Emerging Markets relative to Developed Markets, Commodity shares in its totality, and even the tech bubble as investment themes to look into, but we will have to discuss these in more detail at a later stage.


Disclaimer

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. The information in this blog is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult a qualified financial adviser, if needed. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider – FSP 728

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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