It’s not growth vs value, it’s headline vs fundamentals

Fabiana Fedeli | Global Head of Fundamental Equities
Michiel Plakman | Portfolio Manager Robeco Global Stars Equities
Wim-Hein Pals | Head of Emerging Markets team

The events that have unraveled over the last quarter have added support to our constructive stance on global equities. These include the approval of Covid-19 vaccines and an incoming US administration that is set to unleash further stimulus. Not all equities are expensive: the polarization between growth and value has not only been visible between sectors, but also often within sectors. This leaves an opportunity for investors that are willing to go the extra mile in researching stocks.

Speed read

• Outlook for developed and emerging markets upgraded from neutral to positive
• Earnings revisions have significantly improved across markets and sectors
• Vaccinations pace and potential filibuster tactics in the US need to be monitored

Of course, let’s not kid ourselves: vaccine approvals and the clear US elections outcome do not imply a straightforward path ahead. First, the distribution of vaccines has had a slow start in most countries. Second, the win of the two Georgia Senate seats on 5 January 2021 has secured a 50-50 tie between the Democratic and the Republican parties, implying a de facto ‘blue’ majority, given the tie-break vote of Vice President Harris.

Yet, this does not offer free reign to the Biden administration on all of its planned policies as the administration’s legislative proposals could be blocked in the Senate by filibuster, which can only be overcome with a 60-strong majority or in the budget reconciliation process.

While we recognize the hurdles ahead, we believe that neither of the two issues, the slower vaccinations and the prospect of potential filibuster, are reasons enough to change our supportive stance on global equities. They could, however, cause the occasional negative market reaction. As we have maintained for the last few quarters, the Covid-19 outbreak and its impact on the economic recovery remain the key drivers behind equity markets.

But the amount of resources put in by governments and the healthcare community to increase the vaccination rates worldwide is unprecedented. This bodes well for rapid improvement, although certainly not at light speed. The biggest risk, at this point, is the emergence of vaccine-resistant new strains of the virus. Thus far, this does not appear to be the case.

Five-factor frameworks upgraded
Both our Developed Markets and Emerging Markets teams have turned more positive on their respective equity markets and upgraded their five-factor outlook from neutral to positive. The common denominator is the upgrade of the earnings factor, as earnings revisions have significantly improved across developed and emerging markets and are now positive in both regions.

Importantly, the earnings recovery appears broad based, as earnings revisions are improving across most sectors. As vaccinations and better therapies help mitigate the extent of the Covid-driven economic lockdown, and activity continues to normalize, we expect further rotation from the Covid-beneficiary and Covid-defensive countries and stocks, toward countries and stocks that will benefit from the economic normalization.

Overall, from a regional perspective we continue to favor emerging markets, which is our largest overweight position in our Global portfolios, followed by Europe. We find a few interesting opportunities in Japan, particularly in the technology sector. Within emerging markets, we continue to favor North Asia (China, Taiwan and South Korea).

From a sector standpoint, our largest global overweight position is in technology, although we have cut further our positioning in the tech savvy high flyers in the US and Asia, as comparison bases are destined to become more challenging in the next two quarters and regulatory scrutiny is here to stay. We have also taken additional profit from the Communications Services sector.

We find more opportunities in Industrials, Consumer Discretionary, Specialty Materials and Healthcare, and have selectively added to Financials in the US and in emerging markets. Last but not least, we continue to like sustainability as a theme. Besides the European ‘Green Deal’ and an increasing number of Asian markets pledging carbon neutrality by 2050-2060, the Biden administration with a united Congress should also trigger more investment in this area in the US.