Markets switched from glass-half-empty to full-blown optimism in April. For the first time in months, banks, commodities and miners outperformed consumer staples, while emerging markets outperformed the developed world in a dramatic turnaround fund managers think could last.
After five years of outperformance, growth-style investing via predictable, dividend-paying (and now expensive) stocks is on the way out, and cheap and unloved value stocks are back on investors' radars. "Growth at a reasonable price (Garp) stocks have become growth at no longer reasonable prices," according to Guy Monson, managing partner at Sarasin & Partners.
A flight to bargain-hunting optimism seems surprising with so many causes for global pessimism - look to China's mounting debt pile, oil's shaky recovery and the impact of a possible Brexit for starters. But with the prices of the cheapest assets priced for an apocalypse and the ones considered to be the safest eye-wateringly expensive, markets appear to be ready to embrace more risk.
Emerging markets have outperformed developed markets in the first quarter of 2016, in a dramatic about-turn on the past few years. Between the end of February and 14 April 2016 MSCI Emerging Markets Index had soared by almost 20 per cent, while in the year to date emerging market exchange-traded funds (ETFs) have already recouped 75 per cent of their 2015 outflows, according to BlackRock.
Factors such as political change in Latin American countries and a slowdown in dollar strength matter, but this is mainly a reversal of last year's gloom, which went too far, say analysts. "Emerging markets have outperformed developed markets recently because they saw such a significant drawdown last year," says Gavin Haynes, managing director at Whitechurch Securities. "Investors have been reallocating back there now that valuations are so cheap."
And a host of surprising and contentious sectors have risen to the top of the performance list after years at the bottom of the heap. The best performing equities over the month have included miners, banking stocks and commodities, while the safest ports of last year - utilities and consumer staples - fell behind. FTSE All-Share consumer staples were down 1 per cent in April compared with energy, up 7.5 per cent and the price of Brent crude oil, up 13.6 per cent. For a sense of just how seismic that move is, compare that to the past five years - a chart that looks like the mirror image of April's sector rankings (see chart).
Bank stocks seem like surprisingly strong performers with low interest rates hurting their margins. But investors are buying at rock-bottom prices and growing less concerned about bank balance sheets. JPMorgan chief Jamie Dimon this month bragged that in the event of another Great Recession his bank had the buffer to cover the combined losses of America's largest 31 banks and in the UK Lloyds' (LLOY) special dividend in February remained in investors' minds.
Elsewhere, Rio Tinto's (RIO) share price surged from £18 to £24 in April before falling back again in recent days and Anglo American (AAL) travelled from under £5 to above £7.50 before falling back in recent days.
Michelle McGrade, chief investment officer at TD Direct Investing, says: "This month everything 'risk-off' underperformed. We really have seen a turnaround from growth to value investing, and looking at contrarian ideas now is a good idea."
How to play the themes
Anyone invested in commodities, high-yield bonds, financials and emerging markets will have made gains this month, as will investors opting for a value-tilted ETF or active manager, compared with those in growth-focused funds. Schroder Recovery Fund (GB00BDD2F190) is benefiting from exposure to rallying miners such as Anglo American and energy giant BP (BP.). The fund, which takes a deep value approach and invests in companies that have experienced a setback, is up 10.4 per cent in the year to date after a loss of 12.14 per cent in 2015.
Ms McGrade says funds likely to do well if this scenario continues include M&G Global Emerging Markets (GB00B3FFXX47) which is value tilted and Fidelity Emerging Markets (GB00B9SMK778), which is growth focused. TD Direct Investing categorises both these funds among "unloved and forgotten" companies and sectors likely to outperform in coming years.
Two value-focused funds she suggests could benefit are Veritas Global Equity Income (IE00B04TTW78), "an out-of-favour value fund" that has shunned growth-flavoured sectors such as consumer discretionary in recent years, and Investec UK Special Situations (GB00B1XFJS91), which has ticked up almost 9 per cent over the past three months after losses in 2014 and 2015.
Jason Hollands, managing director at Tilney Bestinvest, says investors should look to JPMorgan Emerging Markets Investment Trust (JMG), which is trading at a 12.6 per cent discount to NAV. "At the end of March 2016 it had 11.4 per cent of its portfolio in Brazil and 5.7 per cent in Mexico," says Mr Hollands. "The trust also had a large 23.3 per cent position in India (which is only 8 per cent of the MSCI Emerging Markets Index) which is seen as one of the brighter spots in the emerging market universe."
The market in a minute STYLE: Value beats growth ASSETS: Equities beat bonds SECTORS: Banks, commodities and miners beat utilities, industrials and consumer discretionary EQUITIES: Emerging markets beat developed markets BONDS: High yield beats government bonds |
