Summary
Focus: The retail investor ‘beat’ survey
Retail investors are more important to global equity markets than ever before. Given this, we surveyed 6,000 retail investors across 12 countries to understand how they are investing, and what they are worried about. They see the main risk as inflation, and many are concerned about current equity market levels. Maybe because of this, portfolios are well diversified and include significant cash. Investors looking to add to commodities and crypto-assets, as well as energy and real estate equity sectors – though tech remains everyone’s favourite.
Earnings the driver for more upside
The S&P 500 has hit new highs, powering through the summer, helped by progress on the $1 trillion infrastructure plan and with inflation coming in less than feared. The most important market driver though remains much-better-than expected company profits. In the US these rose 90% in Q2 versus initial expectations of 65%. We think these positive surprises continue into next year, with further economic momentum and resilience to the virus third wave.
Covid third-wave boosts vaccine stocks
Global virus cases are up 75% since mid July. This has driven another leg of vaccine stock outperformance. @Vaccine-Med is +39% this year. Despite this strong performance, valuations are less than the wider market, as profits have surged, offering some cheap ‘insurance’ to those worried about continued virus risks.
Winners and losers from the strong USD
The USD is at a four month high, surprising many. We see this strength gradually easing as global vaccinations increase and economic re openings build. A weaker USD would add further fuel to the commodity (DJP) and US tech (XLK) rally, and be a relief to hard-pressed emerging markets (EEM), but also a modest negative for the European equity (EZU) rally.
Crypto rebound broadening
Bitcoin (BTC) is up 50% from its mid-July low, and Ethereum (ETH) by two-thirds. The recovery has been broadening with weekly gains led by Ripple (XRP) and Cardano (ADA). Crypto is the best performing asset this year. We see more usage and investor interest, with strong risk-adjusted returns and low correlations.
New kid on the commodity block
Commodities have been resilient to third-wave demand fears and the stronger USD. What unites commodity prices leaders from lithium to coal is the rising importance of environmental drivers. We see a continued rare commodity sweet spot of strong demand and tight supply
The week ahead: Not a dull August
1) China economic data (Mon) to see extra interest given its growing virus upsurge. 2) Notes from the last US Fed meeting (Thur) important as ready to start tightening monetary policy. 3) Q2 results to end with a bang from heavyweights including Walmart, BHP, and Nvidia
Our key views: ‘everything’ rally to continue
see a positive outlook of 1) vaccine rollout and economic re-opening, and 2) huge policy support, driving a continued ‘everything’ rally. We favour assets most helped by this growth rebound: equities, commodities, crypto, and value, and are cautious on fixed income, USD, defensive equities and China.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | 0.87% | 2.39% | 16.04% |
| NASDAQ | 0.71% | 3.25% | 18.95% |
| SPX500 | -0.09% | 2.74% | 15.01% |
| UK100 | 1.34% | 3.01% | 11.74% |
| GER30 | 1.37% | 3.64% | 16.46% |
| JPN225 | 0.56% | -0.09% | 1.94% |
| HKG50 | 0.81% | -5.76% | -3.08% |
*Data accurate as of 16/08/2021
Market Views
Prospering during the summer
- The S&P 500 saw new all-time-highs last week, helped by progress on the $1 trillion infrastructure bill, more very strong Q2 earnings, and high but not-as-bad-as-feared 5.4% inflation. Performance was led higher by financials and materials, whilst utilities and staples lagged. See our latest 15-slide global markets update presentation here.
- Markets have avoided the traditional summer volatility so far, as strong Q2 company profits, still rebounding economies, and low bond yields have all combined to offset the virus ‘third wave’, Fed bond tapering concerns, and usually poor summer seasonality. We think strong profits growth continues to offset risks of Fed tightening lowering high valuations.
The most important driver of more upside
- Further corporate profits growth surprises are the single most important driver of more market upside. Q1 earnings in the US rose 90% versus the same period last year, well above initial expectations for 65% growth. All sectors beat initial expectations, led by our favoured cyclical segments. Results in the rest of the world, from Europe to Canada, have been even stronger.
- We think these surprises continue, as analysts remain far too cautious on the outlook – looking for profits to fall in coming quarters, and for only 9% profits growth next year. We think profits growth will be more than double this given the continued economic momentum.
- Strong profits growth is also the best insurance policy to the largest market risk; Fed tightening and higher bond yields driving lower equity valuations. We see stronger profits offsetting lower valuations.
S&P 500 revenue and earnings growth (year-over-year %)
Covid third-wave drives vaccine stocks relook
- Global covid cases are up 75% at 82 per million people, since the recent trough in mid July, This is approximately two-thirds of the way to the second-wave peak of 105, and case growth has been falling in UK and Europe.
- The covid resurgence, along with slow vaccine rollout and introduction of booster shots has driven another leg of strong vaccine stock performance. @Vaccine-Med is +39% this year.
- Despite this strong performance valuations are less than the market, even for the highest flying biotech names, and the investment case now both growing and lengthening.
USD winners and losers
- The US dollar is at a four month high vs major currencies, and better than many had expected. The USD surprises came from the stronger US economic recovery, outlook for higher interest rates, and ‘safe-haven’ demand as the third virus wave flared. We see these trends easing later in the year and set to weaken the USD somewhat.
- A weaker USD could drive even more commodities (DJP) and technology sector (XLK) outperformance, whilst also giving some relief to hard-pressed emerging markets (EEM). It could also be a small headwind to Europe’s (EZU) recent equity strength.
Crypto rebound broadens
- Bitcoin (BTC) is now up 50% from its mid-July low, and Ethereum (ETH) by two-thirds. The recovery has been broadening with weekly gains led by Ripple (XRP) and Cardano (ADA).
- Crypto has been the best performing asset class this year, even after seeing one of its periodic sharp 50% pullbacks. We are positive the asset class, with usage broadening and institutional investor adoption growth near inevitable, with crypto’s history of high risk-adjusted returns and very low correlation with other assets.
New kid on the commodity block
- Commodity prices have remained resilient to recent virus third-wave growth concerns and the strengthening USD. We see the asset class in a sweet spot of improving demand, as economies reopen, and still tight supply, after a decade of underinvestment. Oil prices showed that this week, flat despite US calls for more OPEC production.
- Environmental drivers are a new and important focus for commodity prices, and the common link between this years top performers. Lithium, cobalt and carbon credit prices have been driven by rising battery demand and plans to expand carbon pricing. Environmental issues have also helped drive soaring coal and oil prices, as they have cut the traditional investment and supply response to these prices.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 0.11% | 1.82% | 19.88% |
| Healthcare | –0.11% | 3.55% | 14.86% |
| C Cyclicals | 0.23% | -0.36% | 11.52% |
| Small Caps | -1.10% | 0.94% | 12.57% |
| Value | 1.21% | 2.61% | 18.44% |
| Bitcoin | 8.21% | 41.89% | 61.51% |
| Ethereum | 9.87% | 62.64% | 329.99% |
Source: Refinitiv
The week ahead: It’s August, but not dull
- Chinese July economic data (Mon) to see extra scrutiny as worries have built on the strength of the global economy (China 2nd largest economy), and over commodity demand (China is by far the largest buyer), as country struggles with its latest covid virus outbreak.
- Focus on the US federal reserve’s minutes (Thur) from its last meeting as we near an announcement of a ‘tapering’ of its $120 billion/month bond purchases. This is the first step to an eventual interest rate hike, and likely causes some market volatility.
- Global Q2 earnings season winds down with reports from world’s largest retailer Walmart (WMT), largest miner BHP (BHP), as well as 2nd largest chipmaker NVIDIA (NVDA), and retail brokerage Robinhood (HOOD).
- Tesla (TSLA) hosts ‘AI Day’ (Thur), highlighting Musk’s Tesla vision as an ‘AI robotics’ company.
Our key views: ‘Everything’ rally to continue
- We see a positive scenario of 1) global vaccine rollout and economic re-opening, 2) still large policy support of low interest rates and fiscal expansion. The main, but well signalled, risk is of gradual Fed monetary policy tightening.
- We focus on reflation and cyclical assets benefitting most from the growth rebound: commodities, crypto, small cap, value equity. Relative caution on fixed income, USD, defensive equities and China.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 0.51% | 0.78% | 21.93% |
| Brent Oil | -0.34% | -4.16% | 35.83% |
| Gold Spot | 1.01% | -1.71% | -6.31% |
| DXY USD | -0.30% | -0.18% | 2.88% |
| EUR/USD | 0.30% | -0.06% | -3.41% |
| US 10Yr Yld | -1.70% | -34.00% | 36.69% |
| VIX Vol. | -4.33% | -17.86% | -32.09% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The retail investor beat
Retail investors have never been this important. We see what they are thinking
What retail investors think has never been this important to equity markets. US household allocations to equities are at record highs and we think set to stay high given the structural growth of free trading, fractional ownership, and online community, combined with rock-bottom bond yields and high household savings. We surveyed 6,000 retail investors across 12 markets globally – Australia to the US – to see what they are thinking. See the summary 15-page investor survey results presentation here.
The biggest fears? Inflation and ‘bubbles
The biggest investment risk seen is inflation, closely followed by the outlook for the global economy. This is unsurprising with US inflation spiking to over 5% and global covid virus cases up 75% since early July. There is also broad concern on the level of equity markets, with the S&P 500 on the cusp of doubling from it’s March 2020 low – the quickest move ever. 40% think markets are in a ‘bubble’ and only 15% disagree.
Looking to add to crypto, commodities, energy, and real estate
With these risks in mid it is perhaps no surprise how diversified investors are, across equities, bonds, and cash (see chart), but also alternatives, and currencies. A high 24% have allocations to crypto assets. Investors are looking to further diversify, planning to add to crypto and commodities, and to traditional inflation-hedge equity sectors such as energy and real estate.
US, Europe, and Tech are the favourite investments
The US is the favoured equity market, but very closely followed by Europe, with China a distant third. Tech dominates sector preferences. Value and ‘re-opener’ focused Financials and Consumer Discretionary sectors seem the most out-of-favour. But nearly a quarter of investors are unsure of there next investment move , highlighting the uncertainty in the current investment world.
Takeaways? ‘Diamond hands’ and ‘Wall-of-worry’
Among our key takeaways are that:
- retail investors are not too different from others, with common worries over inflation and market levels, and increasingly prepared – well-diversified and with cash reserves and doing their research.
- This gives us comfort they are well-prepared to stay invested through any coming volatility (‘diamond hands’ in online speak) and could invest more from available cash and strong household finances.
- We also see the relatively high levels of market concerns as a counter-intuitive positive. As these worries potentially ease – as virus concerns ease, economies re-open further, and earnings rise – this could drive further investments in equities (climbing the ‘wall of worry’).
Current assets owned, and expected change over next 12 months (%)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Positive scenario of 1) global vaccine rollout and economic re-opening, 2) support from low interest rates and government spending. Main risk is from US Fed monetary policy tightening, but will be well-signalled and very gradual. Economies are increasingly resilient new virus case ‘waves’. Focus on most growth sensitive assets: equities, commodities, crypto, small cap and value. Relative caution on fixed income, USD, defensive equities and China. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (55% of total) seeing strongest GDP recovery in 30-years driving earnings upside ‘surprise’, and a rare third consecutive year of 10%+ equity market returns. Valuations at 21x P/E are 25% above historic levels but supported by still low bond yields and strong earnings growth outlook. See further cyclicals and value catch-up, after a decade of underperformance, whilst tech is well supported by its structural growth outlook. |
| Europe & UK | A big beneficiary of the global growth rebound. Helped by 1) a greater weight of sectors most sensitive to the growth rebound, and lack of tech, 2) 25% cheaper valuations than the US, 3) a decade of under performance has made under-owned by global investors. Combination of lower-for-longer ECB plus multi-year €750bn ‘Next Generation’ government spending to drive European GDP and earnings growth more than the US, for the first time in a decade. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China has world’s strongest GDP growth, and benefitted from being ‘first in, first out’ of crisis, but its tech sector crackdown is hurting the market. LatAm and Eastern Europe have more upside to vaccine rollouts, global growth recovery and higher commodities. |
| Other International (JP, AUS, CN) |
Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | The broad ‘tech’ sector of IT, communications, and parts of consumer discretionary (Amazon, Tesla), dominates US and Chinese markets. Expect a more subdued 2021 after dramatic 2020 rally. But are structural stories with good growth, high profitability, and clean balance sheets that justify high valuations, and should continue to rise. |
| Defensives | Healthcare, consumer staples, utilities, and real estate sectors traditionally offer more defensive cash flows, less exposed to changes in economic growth. This has also made them more sensitive to rising bond yields. We expect them to relatively underperform in the current cyclicals focused environment with growth and earnings strong. |
| Cyclicals | We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead market performance. They are most sensitive to the sharp economic recovery and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Financials will benefit from the GDP growth recovery, with higher loan demand and lower defaults. Similarly, they benefit from higher bond yields outlook, charging more for loans than they pay for deposits. Sector has cheapest P/E valuation of any, and regulators recently giving flexibility to pay large 8-10% dividend and buyback yields. |
| Themes | We favour small cap vs large, on more GDP growth exposure, earnings upside, and domestic focus. Similarly, value over growth on GDP recovery, lower valuations, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. |
| Traffic lights* | Other Assets |
| Currencies | We see modest USD weakness as the rest-of-world GDP growth recovery accelerates, and fears over a virus ‘third wave’ ease. A stable or weaker USD traditionally supports Emerging Markets, commodities, and large US foreign earners, such as the tech sector, and could be a modest headwind to large exporters, such as Europe. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | Commodities supported by record-breaking GDP growth rebound, ‘green’ industry demand, years of supply underinvestment, and a stable or weaker USD. Industrial metals (copper) and battery materials seem best positioned, whilst oil price supported by only slow return of OPEC+ supply. Gold hurt by outlook for higher bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Iberia/LatAm | Javier Molina |
| Italy | Edoardo Fusco Femiano |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
COMPLIANCE DISCLAIMER
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.