Don’t Fight the FAANGs?1
Year-to-date growth stocks have outperformed value by over 30%, not only in the downturn given their defensive characteristics, but also during the recovery. While growth stocks have benefited from secular trends, as well as asset-light business models and less cyclical exposure, for more than a decade, the recent shutdowns have actually benefited many growth companies due to accelerated trends in areas such as online shopping, video streaming, and cloud computing. With S&P 500 earnings expected to be down close to 35% in the quarter, the FAANGs are expected to report an average growth of 20% in earnings. Although growth stock valuations appear stretched, fundamentals remain strong and many expect the current low growth and low rate environment to continue, which has historically favored growth stocks. While value stocks have been written off by the market, progress on a coronavirus vaccine or signs of a rebound in global growth could have them poised for a much overdue rally—but it is unlikely to be the start of a new value cycle.
Not So Fast on That “V”
Global growth came in at record‑low levels in the second quarter, with output in the U.S. contracting by nearly 33% and the eurozone down over 40% (on an annualised basis). While the headline gross domestic product numbers were not unexpected, hopes in the U.S. that the rapid recovery that we saw in May and June would continue through the rest of the year have been called into question by the recent mixed jobs data. The two consecutive weeks of increasing initial jobless claims in July challenged the labour market recovery, although the most recent week’s initial jobless claims data showed a bit of a reversal. If this “muddle through” environment continues and the federal government reduces additional support for unemployed Americans—which has kept many Americans afloat during the crisis—the equity market’s hopes for a V-shaped recovery in the back half of the year may be dashed.
Dollar Can’t Buy EM Relief
In July, the U.S. dollar (USD) and U.S. Treasury yields both fell to multiyear lows, pressured by a resurgence in coronavirus cases and the Fed’s pledge to keep monetary policy loose. Normally, this backdrop would be supportive for higher‑yielding emerging markets (EM) amid a low yield environment and provide a boost to their currencies. However, continued economic impacts of the current crisis and limited capacity for fiscal and monetary stimulus, except for China, have weighed on sentiment despite the slump in the USD. This has been evident in the divergence in EM regional currency performance during the virus-related sell-off and recovery. Idiosyncratic issues including financial instability continue to hinder some Latin American countries, leading to significant underperformance versus their more stable, Asian EM counterparts. While a lower USD removes a significant headwind for EM assets, bigger risks abound for broader EM as they continue to weather the crisis.
For a region-by-region overview, download the PDF.
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