#Articles — 24.11.2020

The Great Rotation

Patrick Casselman, Senior Equity Specialist

After a rally lasting two weeks, the markets needed to take a breather last week.

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Traditional cyclical sectors continue to rise...

The Stoxx Europe 600 index ticked up by 1.2%, while the S&P500 corrected slightly (-0.8%). The sector rotation seen in recent weeks continued, with an ongoing rise in cyclical sectors, such as automotive production, energy, basic materials and financial stocks, to the detriment of defensive sectors such as health care and food.

... on the back of good prospects of a vaccine...

For three weeks now, the markets have been reacting to the easing uncertainty in the US Presidential election and the good news about the Pfizer/BioNTech and Moderna vaccines (both 95% effective). On this basis, these pharmaceutical companies will be in a position to apply for a fast-track approval and will probably obtain the green light from American and European authorities before year-end. Vaccination campaigns may therefore start as early as January, first for medical staff and high-risk groups, and probably between March and September for the general public.

... despite some short-term challenges

Investors are essentially ignoring the second wave of the pandemic (which continues to spread in the US) and some weakening economic indicators, such as consumer confidence, retail sales and new jobless claims. They are doing the same with political issues, paying almost no attention to the standstill situation with both the new US incentive programme and the trade agreement between Britain and the European Union. Even the European Recovery Fund and the multiannual budget have still not been approved owing to the veto by Poland and Hungary because of the terms of the rule of law.

The markets shunned the raging pandemic in the United States and the fear of a double- dip recession this winter, clinging to the idea that vaccines will help lead to “normal” life and a permanent economic recovery by mid-2021.

Value stocks have lagged too much

In recent months we have regularly discussed the gap between stock markets on the one hand and the real economy on the other, but also the huge valuation gap between growth stocks and value stocks, in other words, between the new economy and the old. No one denies that e-commerce and online channels can boast better structural growth trends and also benefit from lockdowns. But while the prices of these stocks were posting hyperbolic rises, we have seen many stocks in the old economy reach cyclical floors: financial stocks, auto producers, energy stocks, etc. However as in 2000, this movement was too one-sided and had to reverse sooner or later.

The US elections and encouraging vaccine news triggers the great rotation


After some false starts, since early November we have been seeing a convincing rotation out of growth stocks into value stocks, or from defensive stocks to cyclicals. Catalysts included Joe Biden's victory, thus paving the way for a more reflationary policy and a rise in interest rates, and the good news about vaccines that suggest a reopening or continuation of the recovery in more traditional segments of the economy. However, the rotation did not imply a sharp correction in growth stocks (the Nasdaq is still hovering at around an all-time high), but instead consisted of a vigorous catch-up movement for lagging cyclical value stocks, as well as for small caps relative to large caps, as well as lagging regions. While US and Chinese stock markets have been in positive territory for some time, we are seeing essentially European stock markets gaining ground since early November, thereby reducing their year-to-date losses. In three weeks, the S&P500 and Nasdaq have risen by 8% and the Stoxx Europe 600 by 14%, while indices comprised of more traditional value stocks such as the Eurostoxx50 have even gained 17%. European stock markets thus broke through the ceiling of their rather flat trading range since the beginning of the summer. 

Potential corrections will offer a buying opportunity

However, further volatility in the short term cannot be ruled out, in view of the weakening economic indicators and the fact that the new US stimulus programme is waiting longer than expected (and may only occur after the inauguration of the new president on 20 January 2021), as well as the growing risk of a ‘hard’ Brexit if no trade agreement is reached. However, given that 2021 should see a more pronounced economic recovery through vaccines and new fiscal incentives, we would be in favour of taking advantage of any further corrections by looking for buying opportunities. There may also be a pause in the rotation into cyclical value stocks, but we think the movement we have seen recently is only a foretaste of an even broader catch-up movement that awaits us next year.