Over the last five or six years, the earnings of many health-care companies have climbed at almost the same rate as technology concerns, but the former group has seen virtually no multiple expansion, Jain says. Usually, Big Pharma is a whipping boy for politicians of all stripes, but the pandemic has quieted many of the critics. “People are willing to pay for drugs that are truly innovating but not for companies that are price gouging,” Jain maintains.
Most observers are anticipating a rotation out of Big Tech, the FAANG stocks, plus Microsoft. Sonders writes in her 2021 outlook, “The rotations will continue to come in fits and starts—largely driven by shorter-term virus-related news about economic activity.” Since Pfizer reported its Phase III vaccine trial results, technology stocks “have taken a back seat to the more cyclical sectors, which could have [farther] to go once the current hit to the economy passes.”
Schwab had favored large caps since March 2017, but Sonders reports the firm is now market-cap neutral. “Assuming the U.S. economy moves into a higher gear in 2021, small caps should be relative beneficiaries given their higher level of cyclical exposure,” she writes.
Going Global
Virtually all the professional investors interviewed for this article agreed that better bargains exist beyond U.S. borders. Almeida at MFS acknowledges American stocks deserve a premium because they are composed of more asset-light businesses with high-value intellectual property—but investors have been rewarding them for more than a decade.
Many American investors may barely have noticed, but emerging markets have been on a roll for the last two years. The MSCI Emerging Markets Index climbed 18.4% in 2019 and 18.3% in 2020. While Bernstein has been a long-time skeptic of emerging markets, he now considers the asset class worth looking at.
At the depths of the financial crisis in 2008, “nobody was saying emerging markets would emerge unscathed,” recalls Research Affiliates founder Rob Arnott. Back then, the consensus was they needed developed markets to sell their goods and commodities to. In fact, they came back from the crisis faster than other markets, advancing 78.5% in 2009.
Arnott thinks a replay of that scenario is possible. Right now, the worries center on their inadequate health-care systems. “Emerging markets may suffer more human damage but less economic damage,” he maintains. “They are far more accustomed to crises like [the pandemic] because they happen much more often” in less developed countries.
Another bruised equity market that Arnott likes is the United Kingdom, which has been afflicted by both a nasty Covid surge and fears of a messy Brexit. U.K. stocks, he notes, sport a Shiller PE ratio of 14, which is even lower than the 15 multiple on emerging markets.
Perhaps the biggest surprise awaiting advisors and their clients is that the 11-year bull market run has left American investors “geographically myopic,” Bernstein argues. New innovation and disruption ETFs are proliferating on a weekly basis.
All ARK Invest’s Cathie Wood has to do is announce a space ETF, and the entire sector goes wild.
“Returns outside the U.S. could be substantially better than inside,” Bernstein continues. “I’m not saying the U.S. will have a lost decade, however.”
What he is saying is that American investors are overly concentrated—too many are sitting on one side of the boat. The U.S. dollar has been softening for most of the last year, and the trade deficit is bulging. If non-U.S. investing stages a comeback and money continues flowing out of America, a lot of people could find themselves on the wrong side of the boat.