MARKET VIEWS FROM BLACKROCK FUNDAMENTAL EQUITIES

Stock Market Monitor: Q2 2021 equity market outlook

25-Mar-2021

All about earnings. Markets are already adjusting to the idea of post-COVID growth, and we believe the companies that can outperform now are those able to deliver on earnings. Highlights of our Q2 outlook include:

  • We see a post-COVID global growth surge supporting equity markets
  • Investors should look beyond style and sector to company specifics
  • Electric vehicle demand is creating opportunities across industries

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We expect plenty of nuance at the individual stock level – and opportunities for active selection to drive performance.

We expect global growth to surge once the COVID crisis eases and lockdowns are lifted. The cyclical value stocks closely linked with economic growth – overlooked for a decade and further beaten down by the pandemic – should benefit this quarter as economies restart. But many have already notched significant gains, as the chart below shows, making valuations less attractive than they were six months ago. At the same time, some of the companies that grew rapidly as a result of technological innovation – a long-term trend accelerated by the pandemic – are now available at better valuations after investors rotated their portfolios towards value stocks.

Value’s recent strides
Performance of value versus growth stocks, 2018-2021

Performance of value versus growth stocks, 2018-2021

 

Sources: BlackRock Investment Institute, with data from Refinitiv DataStream and MSCI, March 2021. The chart shows the relative performance of the MSCI World Value Index versus the MSCI World Growth Index from 1. Jan 2018 to 8. March 2021. An increase in the index level means value is outperforming growth. The index is rebased to 100. Past performance is not indicative of current or future results. It is not possible to invest directly in an index.

The key now, in our view, is to find companies, across styles and sectors, that can exceed shareholders’ expectations.

Earnings driven market

Selective within cyclicals
Economically sensitive stocks still have room to rise, but the key to outperformance will be the ability of companies to deliver a positive earnings surprise. One path to a positive surprise: pricing power that will allow them to pass rising costs on to customers. Sellers of raw materials such as copper are in a strong position as the “green” spending promised by governments boosts demand.

We also like businesses positioned to benefit from a greater-than-expected surge in consumer demand. Australia saw twice as many restaurant bookings in February as for the same month in 2019, and in Singapore there are three-week waiting lists for neighbourhood restaurants that previously required no reservation. We see this as a sign of what’s to come in Europe and the U.S. Some U.S. airline executives believe domestic travel could reach 2019 levels by September.

Banks is another area where we could see an earnings surprise. The amount of money needed to cover loan losses may be less than expected, on the back of government support for businesses and consumers and a strong economic recovery into 2022

The winners that can keep winning
Valuations for many of the pre-pandemic winners that benefitted further from trends accelerated by COVID – such as tech and renewable energy companies – have retreated from lofty 2020 levels, making them more attractive for long-term investors.

Investment in IT and cloud computing should remain elevated post-pandemic as part-time remote working becomes the new normal. Companies that can help with digitalization appear well poised to take market share and deliver impressive earnings results.

We believe markets underestimate the transition to a low-carbon economy – so companies integral to this process could deliver an earnings surprise. Semiconductors are essential for solar power, smart grid technology and electric vehicles – and makers have been able to hike prices as supply remains limited due to pandemic-related disruption.

We believe identifying the potential winners as the market cycle transitions will require assessing the stock-level opportunities across both growth and value.

Sustainability spotlight: electric cars zip into focus

The importance of sustainability has been further illuminated amid the COVID crisis, heightening awareness around environmental and social issues. We are actively identifying investment opportunities arising out of the increased attention and demand in these areas. One key example: electric vehicles (EVs). Consumer demand is set to soar over the next decade – and this is having a dramatic impact across industries including semiconductors, materials and robotics.

Read the full Stock Market Monitor for more.

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Nigel Bolton
Co-Chief Investment Officer of BlackRock Fundamental Equities