Uddrag fra Merril
Weakness Is An Opportunity
Equity markets were under significant pressure last Friday as concerns grow over a new coronavirus variant emerging in South Africa. Investor risk aversion has increased considerably with cyclical shares including Commodity and consumer related companies experiencing the largest drawdown. At this point, the economy was beginning to rebalance itself and grow at an above average clip heading into next year with better than expected corporate revenues and profits as the key support to risk assets.
Recently, with markets at or close to all-time highs in the U.S., despite weakness in Technology shares, and longer dated yields breaking out again to the upside, the broad markets were likely ripe for a pull-back if a new concern developed. The new variant is something the markets were not factoring into their scenario analysis in the short term.
In fact, most investors were more concerned about a fourth wave developing driven by increased infections from the much discussed Delta variant in the Winter months in colder weather states. Simply put, risk assets do not like uncertainty particularly as it relates to the overall level of economic growth, the level of profits, and a potential change to the story line for a new year.
We will continue to monitor the latest situation and its potential effect on economic and corporate fundamentals as we close out this year. Although new variants are always a concern, we view this latest weakness as more of an exhale of the latest investor enthusiasm over the easing of supply chain disruptions, strong job growth, and a Fed determined to approach monetary policy with a transparent and balanced approach. We expect the dominant story to remain strong corporate fundamentals, a healthy consumer, and a broader economic backdrop that continues to learn to advance in the face of the
coronavirus evolution.
As concerns come and go, we expect valuations in the Equity markets to remain sticky around current levels and not rise further. We expect the profit foundation to drive asset prices heading into and through 2022. A marketplace that stays “on edge” but yet has solid enough fundamental underpinnings can grind higher over time, in our view. We would use the latest concerns as an opportunity to add to cyclical exposure and specific targeted growth segments of the broader market such as mega cap Technology.
This barbell approach, in our opinion, should help investors participate in an Equity environment that is not yet in late cycle. The areas most vulnerable remain the longer duration, higher beta, little to no profit areas across the Equity spectrum.
We remain Equity overweight relative to Fixed Income and still prefer the U.S. relative to the rest of the world. Weakness regarding new concerns that are not likely to alter the “growth curve” in a material way are buying opportunities from our perspective. This latest pressure provides investors more attractive prices in the higher-quality areas building and expanding the already strong free cash flows heading into next year.
