Summary
Focus: The thematic investing boom
Interest in investment themes, rather than traditional country or sector allocations, has boomed and has a long way to go. Performance has been strong, tech disruption rising and ESG issues more important. Thematic investing does have some unique issues, from diversification to volatility. Cleantech and digital transformation are the current focus, and younger investors have taken the lead. Our Smart Portfolios offer many thematic ideas, with top performers led by @ChinaCar, @Driverless, @FashionPortfolio, and @FuturePayments.
Resilient to overdue market volatility
Global markets were hit by some overdue volatility last week, as worries over global growth and the Fed’s imminent tapering decision built. We see markets as well-supported and fears overdone, with the ‘buy-the-dip’ investor response well-justified. Continued upside surprises to company earnings growth is one of the key fundamental drivers. A big support here is record corporate profit margins. Many think these are about to fall. We disagree, as cost pressures ease, the tech sector grows, and depressed cyclical sectors recover.
Stock market records falling
The S&P 500 early last week doubled from its March 23, 2020 crisis low, in the fastest start to a bull market in near a century, led by an over 1,600% surge in Moderna (MRNA), followed by Caesars Entertainment (CZR), Tesla (TSLA). S&P 500 seen 49 all-time-highs this year, closing in on long standing record of 77.
Misunderstood retail investors
Retail investors are more important than ever, here to stay, and still misunderstood. Most have been investing over five years, are diversified, and have significant cash positions. This gives us comfort they are well-prepared to stay invested through market volatility and could invest more, as 25% say they would do today.
Cardano rises to third
The broad crypto recovery rally took a breather last week after briefly regaining the $2 trillion market cap level. Cardano (ADA) saw more gains, making it to the 3rd largest crypto, ahead of the September Alonzo hard fork that brings it smart contract functionality. It is the most widely held crypto asset on the eToro platform.
Growth fears and USD hurt commodities
The combination of rising global growth fears and the stronger USD drove broad weakness led by oil, copper, and lumber. We remain positive, especially industrial metals, and see weakness as short-lived. We examine the pros and cons of investing directly or via equities.
The week ahead: Taking the growth pulse
1) Timely global purchasing manager index (PMI) growth data (Mon), as GDP rebound fears have risen. 2) Fed meets in Jackson Hole, Wyoming (Thur) to talk about tapering its $120bn/month bond purchases. 3) Q2 earnings from Salesforce, Snowflake, Peloton, JD.com, Xpeng.
Our key views: Remaking the positive case
We see a positive outlook of 1) vaccine rollout and economic re-opening, and 2) still huge policy support, offsetting virus third wave and Fed tightening risks. We favour assets most helped by this growth rebound: equities, commodities, crypto, and value, and are cautious fixed income, USD, defensive equities and China.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -1.11% | 0.17% | 14.75% |
| NASDAQ | -0.59% | 0.68% | 18.25% |
| SPX500 | -0.73% | -0.82% | 16.17% |
| UK100 | -1.81% | 0.86% | 9.71% |
| GER30 | -1.06% | 0.89% | 15.23% |
| JPN225 | -3.45% | -1.94% | -1.57% |
| HKG50 | -5.84% | -9.05% | -8.75% |
*Data accurate as of 23/08/2021
Market Views
Seeing some overdue volatility
- The S&P 500 saw a volatile week, down 0.6%, but also showing a strong ‘buy the dip’ investor response. Higher risk aversion saw the USD hit a nine-month high and US 10-year bond yields near 1.2%, whilst commodities fell 4.2%. Equity weakness was led by commodities, energy and materials, whilst defensives, healthcare and utilities, outperformed. See our global markets summary overview presentation here.
- Volatility is being driven by worries on China’s further tech sector crackdown, the virus third wave impact on global growth, and Fed’s imminent move to reduce its $120 billion /month bond buying programme. Last week also saw disappointing economic data from both China (retail sales) and the US (retail sales).
- We see markets as well-supported and fears overdone. The GDP and earnings growth outlook is strong, and under-estimated. Global fiscal and monetary policy support is huge. Vaccinations are building, the ‘third wave’ to peak soon, and economic re-openings have a very long way to go. This continues to offset the risk of Fed tightening and lower valuations.
Stock market records falling
- The S&P 500 early last week doubled from its March 23, 2020 crisis low, in the fastest start to a bull market in nearly a century, led by an over 1,600% surge in Moderna (MRNA), followed by Caesars Entertainment (CZR) and Tesla (TSLA).
- Market has seen 49 all-time-highs this year, on pace to challenge the longstanding 1995 record of 77. This is not inevitable. S&P 500 did not see a new high in twenty four years from 1930-1954, and only nine new highs from 2001-2012.
Margins to stay high: S&P 500 net profit margins vs cost pressures
Profit margins to stay high, helping earnings
- S&P 500 company profit margins surged to a record 13% last quarter and are key to the profit surprises we see as taking markets higher. They are also the reason many are so cautious on future profits: that high margins are not sustainable and will be hit by rising costs.
- We disagree for 3 reasons: 1) we see cost pressures peaking now (see chart), and being offset by the revenue rebound, 2) a rising tech sector continues to structurally boost margins, and 3) ‘re-opening’ segments, from hotels to airlines, have barely recovered weak margins.
Misunderstood retail investors
- Retail investors are more important than ever, are here to stay, and still misunderstood according to our retail investor survey.
- Most have been investing for over five years, are diversified, have significant cash positions, and are looking to get more diversified by adding to crypto and commodities. US equities and tech are the unsurprising favoured investments, but Europe and inflation-hedges energy and real estate are close behind. This gives us comfort they are well-prepared to stay invested through any overdue market volatility and could even invest more, as 25% say they would do today.
Cardano rises to third place
- The market value of cryptocurrencies rose above $2 trillion last week despite the broader weakness across both equities and commodities. 20%+ gains were seen by Cardano (ADA), Polkadot (DOT), and Ripple (XRP).
- Cardano (ADA) has been boosted ahead of the September Alonzo hard fork that would bring smart contract functionality. It is now the third largest crypto asset behind Bitcoin (BTC) and Ethereum, (ETH) with a market value around $80 billion, and the most widely held on eToro.
Commodity growth fears and stronger USD
- Commodities fell last week, with the broad Bloomberg commodity index down 6% from its July high. Brent oil, copper, and lumber all fell 7% last week. The culprit was the combination of rising global growth fears, after weaker China data Monday and with new virus cases rising, and further USD strength. We remain positive.
- We examine the pros and cons of owning commodities directly or indirectly via equities. Commodity equities have underperformed in the long term, they may be more suitable for many, with greater choice, dividend income, and operating leverage to higher prices.
- Industrial metals are our favourite segment, on rising ‘green’ demand and a still robust China outlook. Like copper (with equities like FCX and ANTO.L), lithium (ALB, SQM), and uranium (CCJ).
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -0.05% | 2.19% | 19.82% |
| Healthcare | 1.36% | 3.78% | 16.43% |
| C Cyclicals | -2.11% | -2.22% | 9.17% |
| Small Caps | -2.50% | -2.97% | 9.76% |
| Value | -1.11% | 1.44% | 17.13% |
| Bitcoin | 4.72% | 52.88% | 61.13% |
| Ethereum | 0.78% | 66.17% | 333.32% |
Source: Refinitiv
The week ahead: Taking the growth pulse
1. Forward-looking purchasing managers indices (PMIs) from UK, Europe, Japan, Australia, US (Mon) give a timely update on global growth, as investor worries have built with the virus third wave. We expect continued US/EU resilience, with Asia significantly impacted.
2. Fed policy makers meet in Jackson Hole, Wyoming (Thur-Sat), continuing discussions on when and how much to cut their $120 billion monthly bond buys. Expect a decision as soon as Sept. 22 Fed meeting and cuts by year end.
3. Q2 earnings due from cloud-companies Salesforce (CRM) and Snowflake (SNOW), work from-home winner Peloton (PTON), China e commerce heavyweight JD.com (JD.US) and local electric vehicle pioneer Xpeng (XPEV).
Our key views: Remaking the positive view
- 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. This is resilient to current volatility.
- The main risk is Fed monetary policy tightening, which we see as gradual and well-flagged, alongside growth risks from the third virus wave, which we see peaking soon.
- 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* | -4.21% | -4.73% | 16.79% |
| Brent Oil | -7.86% | -9.95% | 25.56% |
| Gold Spot | 0.09% | -1.25% | -6.10% |
| DXY USD | 1.02% | 0.59% | 3.29% |
| EUR/USD | -0.83% | -0.62% | -4.23% |
| US 10Yr Yld | -2.50% | -1.55% | 34.19% |
| VIX Vol. | 20.13% | 7.91% | -18.42% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The thematic investing boom
Thematic investment interest is booming, and has a long way to go
Funds focused on investment themes, rather than on traditional sectors or countries, have seen booming interest. They now have over $600 billion of assets, in themes ranging from disruptive technologies to cannabis. This is three times more than in early 2020, but still represents under 2.5% of assets in the global funds industry. We see further thematic investment growth ahead, with 80% of respondents in our global retail investor survey of 6,000 investors in 12 countries considering thematic investing.
Cleantech and digital transformation lead interest, with younger investors taking the lead
This interest was led by cleantech (see chart), and opportunities from mitigating climate change. This was closely followed by opportunities in the increased adoption of digital technologies, from online shopping to video conferencing. This trend is being led by younger investors, with over 90% considering investment themes. Older investors are lagging, with 32% saying they don’t consider long term themes.
Tech disruption, the rise of environmental, social, and governance issues, and strong performance
Thematic investing growth has been driven by 1) the increased adoption of, and disruption from, technology, 2) the rising importance of environmental, social, and governance (ESG) investment issues and 3) the strong outperformance of Growth investment styles, such as tech. The cross-sector nature of these trends is not well reflected in traditional ETF’s. Tech dominates broad themes, followed by physical themes (energy transition, food, infrastructure), and then social (from demographics to wellness and cannabis).
Thematic funds have some of their own issues that need considered
Thematic funds have some special characteristics worth highlighting. They can be more expensive than other mainstream sector and country ETF’s. They can be less diversified and with fewer stocks, and therefore more volatile. The stocks held tend to be more focused on mid and small caps than mainstream indices. They also tend to be more global, reflecting the broader opportunity set.
Some themes to watch
eToro Smart Portfolios offer many thematic investment ideas, with the top performers the last year led by @ChinaCar, @Driverless, @FashionPortfolio, @FuturePayments, and @RenewableEnergy. We have also recently written on @Travelkit, offering broad exposure to gradually reopening global economies, and @Vaccine-Med, as the covid virus response lengthens and broadens.
eToro retail investor survey; what are your favourite long term themes? (%)
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.