Equity income funds begin to buck the trend; Fresh warning signs as tech takes a back seat
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Proxy for growth
Last week we noted that two distinct parts of the market have been leading the way this year: cheap stocks, and those at the other end of the scale. SocGen has this week added a bit of meat to those bones, and suggested it’s a little more nuanced than that.
The bank says it’s cheap and volatile stocks that are the two groups doing particularly well at the moment. In the latter case, that band includes shares that are volatile but also expensive – a category into which the likes of Tesla would certainly fall. Both the cheapest and the most volatile portions of the MSCI World are up 3.5 per cent year to date.
With retail investor interest seemingly rising all the time, it’s also worth highlighting another of the bank’s discoveries. In the US, shares with the smallest prices – “akin to playing penny stocks” – are seeing the biggest returns.
For wealth portfolios, there are more pertinent consequences. SocGen says it’s the “defensive and expensive” positions, ie bond proxies, that have been notable underperformers so far this year. In that context, DFMs might be pleasantly surprised by how well their income offerings have held up.
After a troubled 2020, equity income funds have begun the new year on a slightly brighter note. The average UK income fund is ahead of its growth equivalent in terms of capital growth; the typical global income fund has also outstripped its conventional peers. The two income sectors are also ahead of most developed market sector averages, including the US, Japan and Europe.
These are baby steps for a hard-hit part of the market – and as SocGen notes there are clearly still countervailing forces at play. But thus far the signs are a little more positive for those holding dividend-paying strategies.
The new crowd
For all the talk of highly valued shares continuing to prosper, the leading lights of the tech sector have found things slightly more difficult in recent weeks. Tech funds themselves have done well enough, but big names - we mentioned Microsoft last Monday, and the Faangs could also be added to that list – have underwhelmed a little.
That’s part of the reason why long tech is no longer deemed the most crowded trade in the latest Bank of America fund manager survey – after eight consecutive months topping that particular chart. Allocations to tech have fallen to their lowest level in more than two years, according to the survey.
The other reason for tech’s deposition is a more speculative asset has taken its place. Most fund managers may be unable to buy bitcoin, but that hasn’t stopped them deeming it the biggest consensus bet of the moment.
Other shifts detailed by the survey are of more relevance to professional allocators. Investors’ average cash level dropped to 3.9 per cent, the lowest in almost eight years. Inflation expectations, meanwhile, are at an all-time high. Some 92 per cent of respondents expect prices to rise globally over the next year, a proportion greater than the previous peak in May 2004. Record overweights to emerging markets, small caps versus large caps, and the first overweight to energy in more than a year are other notable findings.
These trends have not unreasonably led the bank’s bull/bear indicator to suggest a risk correction is “imminent”. Yet allocators themselves will know that context-free statistics don’t tell the whole story – recent years provide more than enough evidence on that front.
So it’s perhaps a different datapoint that will worry them more. Expectations of a vaccine-fuelled boost to economic activity have been pushed back by six weeks; this is now expected to begin no earlier than late June. That's a relatively long time to wait for investors who’re eagerly anticipating a return to some kind of normality.
Back in black
That consensus overweight to EM is being driven, in no small part, by China. Chinese equity funds have raced away again this year, the typical offering having already returned 7.5 per cent. Asia ex-Japan funds aren’t far behind, adding 6 per cent on average thus far in 2021.
The big difference this year compared with last is that it’s conventional Hong Kong stocks that are back doing the heavy lifting. Having underperformed last year – and seen A-Shares soar in their stead – the Hang Seng’s constituents have rallied hard in recent weeks. A-Shares are also in the black, but to a lesser extent. There are still plenty of questions for those investing onshore or offshore – the recent travails of Ant Group chief among them – but wealth firms holding either type of China strategy will be pretty content in the short-term.
