Summary
Focus: Why styles and sectors really matter
Getting the sectors and investment factors right matters. The past 25 years the average S&P 500 gap between best and worst performing sectors is 44%, and factors 29%. Value and Small Caps have done best in rising markets. Dividends and Quality in falling markets. Growth is the best ‘all weather’ factor. Energy and Financials are our favoured sectors. ‘Bond proxy’ defensives our least. Tech is fine. See over 260 exchange traded funds (ETFs) on the eToro platform.
Volatile US week, but International resilient
US markets pressured by outlook for 3+ interest rate increases this year, and inflation reported at 7%. Cheaper and more cyclical overseas markets did better. US bond yields near 1.8% and the USD fell. The start of Q4 earnings is the next big catalyst. We are positive markets for 2022. See our latest presentation, video updates, and follow us on twitter @laidler_ben.
Riskiest assets are not all equal
The perceived ‘riskiest’ assets are down 30-45% from 2021 highs versus the <5% declines of ‘big tech’ and the broader indices. We prefer meme stocks and bitcoin to disruptive tech.
A strong earnings season needed
Global Q4 earnings season started. Consensus is for strong 20% growth from S&P 500 and 50% from Europe’s Stoxx600, with UK +200%. We see room for even more, led by cyclicals.
Anyone can own the private equity (PE) boom
The PE industry has boomed, and is increasingly investable, from KKR (KKR) to Blackstone (BX). The stocks actually have better, if more volatile, returns than the funds themselves.
The Buy now, Pay Later (BNPL) shakeup
Now, Pay Later (BNPL) is a big new driver of retail sales, especially for young. But competition and regulation looms for the incumbents from Affirm (AFRM), Block (SQ), and Klarna. See Page 2
A better weekfor bitcoin. Metaverse launch
Bitcoin (BTC) bounced off the $40,000 level after a decline matching the -43% average of the 16 corrections the last decade. Meme coin Shiba (SHIBxM) led gainers. Launch of ‘MetaverseLife’ Smart Portfolio includes the Decentraland, Sandbox, and Enjin platformcoins.
A testing level for oil prices
Commodities boosted by a weaker USD and the energy rally. Brent crude regained the $85/bbl. October high, which last saw stepped up political concerns and calls for more oil supply. Long suffering gold saw some relief. Industrial metals shrugged off weak China imports.
The week ahead: Earnings in the spotlight
1) US markets are closed Monday for the MLK holiday. 2) First full week of the key Q4 earnings season includes banks BAC, GS, MS and some big techs like NFLX and ASML. 3) China’s central bank to consider easing policy further (Thu), bucking the global trend to higher interest rates, with its economic growth under pressure.
Our key views: Look through the volatility
We see a positive 2022, but with lower returns and higher volatility than last year. Economic growth is strong and earnings forecasts too low. Valuations should stay high as rates rise from still very low levels. We focus on cyclical assets that benefit from strong growth: like Value equities, small caps, commodities.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -0.88% | 1.54% | -1.17% |
| SPX500 | -0.30% | -0.91% | -2.17% |
| NASDAQ | -0.28% | -1.82% | -4.80% |
| UK100 | 0.77% | 3.76% | 2.15% |
| GER30 | -0.40% | 2.26% | -0.01% |
| JPN225 | -1.24% | -1.48% | -2.32% |
| HKG50 | 3.79% | 5.13% | 4.21% |
*Data accurate as of 17/01/2022
Market Views
Signs of stabilization. International leads
- US markets tried to stabilize under pressure from outlook for 3 interest rate increases this year, and latest inflation reported at 7%. The start of Q4 earnings is the next catalyst. Bond yields were flat and USD fell. Cheaper and more cyclical International markets continued to lead. Energy (+5%) led performance vs Discretionary (-1.7%). We are positive markets for 2022.
Riskiest assets are not all equal
- The huge repricing of Fed interest rate expectations has taken the biggest toll on the perceived ‘riskiest’ assets (see chart). Most are down 30-45% from 2021 highs versus the <5% declines of ‘big tech’ and the broader indices.
- But meme stocks (like GME, AMC) and bitcoin are still well ahead of market, for fundamental reasons. This makes them the focus for those looking for a sentiment turnaround, and with the high risk-appetite to match. All-weather ‘FAANGM’ big tech is a core lower-risk preference for us. Disruptive tech’s (ARKK) still very high valuations (11x P/Sales) and exposure to rising bond yields likely remains a headwind.
A strong Q4 earnings season needed
- Global fourth quarter 2021 earnings season has started. Consensus is for strong 20% earnings growth from S&P 500 and 50% from Europe’s Stoxx600, with UK +200%. We see even more, led by cyclicals, with robust revenues and continued near-record net profit margins.
- A strong earnings season is needed. 1) To offset hawkish Fed pressures on high valuations, and 2) refocus attention on the too-low 8% global earnings growth expectations for 2022.
Anyone can own the private equity boom
- Private equity (PE) has boomed the last decade. Industry assets have risen to $7 trillion, returns averaged 12% annually, and uninvested ‘dry powder’ a record $3 trillion. There are more PE funds than hedge funds. PE firms have grown into huge, diversified asset managers and are increasingly listed on the stock exchange.
- TPG (TPG) was the latest last week in a $10 billion IPO. These global stocks, from KKR (KKR) to Brookfield (BAM), 3i (III), and Partners Group (PGHN.ZU) have been better, if more volatile, investments than the actual funds themselves.
- We see more public PE listings ahead as the industry races for scale, and valuations rise.
Buy Now, Pay Later (BNPL) industry shakeup
- Buy Now, Pay Later (BNPL) is a new and big driver of retail sales, especially for the young, and in markets like Australia, UK, US. It was c$150 billion, or 3%, of global ecommerce sales last year, and over 10% in the US.
- This spawned $22bn market cap Affirm (AFRM), Block’s (SQ) $29bn buy of Australia’s AfterPay, and Europe’ most valuable ‘unicorn’ Klarna.
- More competition and regulation will help growth BNPL and the retail industry, but increasingly challenge BNPL incumbents. See @ShoppingCart and @FuturePayments.
‘Riskiest’ asset performance (Index = 100, 31/12/2020)
A better week for bitcoin
- Bitcoin (BTC) bounced off the key $40,000 price level. It’s decline from November highs has near matched the median -43% plunge seen its 16 major corrections of the past decade. Meme coin Shiba (SHIBxM) was among gainers, on talk of inclusion on other trading platforms.
- MetaverseLife Smart Portfolio launched. Offers exposure to key projects, both stocks and crypto assets, in the metaverse industry. Includes blockchain-based metaverse platforms Decentraland, Sandbox, and Enjin.
A testing level for oil prices
- Commodity prices were firm, helped by the rally in energy prices and a weaker USD (which cheapens dollar-priced commodities for many). A lower USD, and stable US bond yields, particularly helped long-suffering gold prices. Industrial metals shrugged off lower-than expected import data (+19% vs last year) from China, the world’s largest commodity user.
- Brent crude (OIL) prices regained the $85/bbl. highs last seen in October 2021 and 2018. This was a 25% rally from recent lows. This key price level has historically stoked political concerns on inflation and growth. Last October kicked off US plans to sell oil from its strategic reserve and calls for OPEC+ to produce more. We see prices well-supported. Supply is tight, with OPEC spare capacity over-estimated, and demand strong. USD now easing. Inflation rates are near peak.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -0.15% | -2.60% | -5.13% |
| Healthcare | -0.70% | -1.66% | -5.90% |
| C Cyclicals | -1.70% | -1.28% | -4.20% |
| Small Caps | -0.80% | 0.13% | -3.69% |
| Value | -0.07% | 3.54% | 0.50% |
| Bitcoin | 3.16% | -9.10% | -9.20% |
| Ethereum | 3.28% | -13.39% | -11.63% |
Source: Refinitiv
The week ahead: Earnings in the spotlight
- US financial markets are closed Monday, in a shortened week. The holiday honours US civil rights leader Martin Luther King. This is a relatively new holiday, in place since 1998.
- Q4 earnings will come thick-and-fast including big US banks BAC, GS, MS, as well as some big global tech’s like NFLX and ASML. We see over 20% US profits growth and 50% in Europe.
- See China central bank meet (Thu). Economic growth and their ‘zero-tolerance’ covid policy under pressure. The bank has started easing policy, the opposite of other central banks.
- See 3-day North American Bitcoin Conference and US National Retail Federations ‘NRF 2022’.
Our key views: Lookthrough the volatility
- We see a positive 2022, but with lower returns and higher volatility than last year. Earnings forecasts are too low, with economic growth still strong. Valuations should stay high, with interest rates rising from very low levels.
- US Fed has turned more hawkish, set to raise rates 3x this year to combat 7% inflation. But this will still be a lower and slower rate upcycle than historic. The omicron virus is dampening growth but economies are increasingly resilient.
- We focus on cyclical assets that benefit most from decent growth: commodities, crypto, small cap, and value. We are more cautious on fixed income, the USD, and defensive equities.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 2.23% | 7.39% | 4.41% |
| Brent Oil | 5.54% | 18.66% | 10.94% |
| Gold Spot | 1.16% | 1.04% | -0.72% |
| DXY USD | -0.58% | -1.45% | -0.83% |
| EUR/USD | 0.46% | 1.57% | 0.38% |
| US 10Yr Yld | 2.48% | 38.50% | 27.86% |
| VIX Vol. | 2.29% | -11.03% | 11.44% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: Making money from investment factors and sectors
Getting sectors and investment factors right matters, and can further boost market returns
Thinking about sectors (from tech to financials) and investment factors (from Value to Small Cap) can help you build the diversified investment portfolios you want. Getting them right can also be a significant driver of performance. We highlight the numbers ((see chart), and the many ways to slice-and-dice the market by sector and investment factor. There are over 260 exchange traded funds (ETFs) on the eToro platform, many of them allow these sector and investment style allocations, whilst staying well-diversified.
The average gap between the best and worst performing sector is 44%, and factor 29%
We analyse S&P 500 data for the last 25 years and compare the performance differences between the best and worst performing sectors, and the best and worst investment factors. The results are dramatic. The average gap between sectors is 44% and the gap for investment factors is 29%. These also tend to be even greater in times of stress, such as the 2020 covid-crash, the 2007-9 global financial crisis and the 1999-2000 tech bubble. For example, the smallest annual sector performance gap was 25% and the largest 98%.
Value and Small Caps favoured factors. Dividends and Quality for later. Growth for ‘all-weathers’
Value (IWD) and small caps (IWM) have historically performed best in up markets. We expect lower and more volatile returns than last year but still robustly positive markets. Value benefits from lower valuations and higher growth. Financials is its largest sector component. Whilst small cap earnings growth is twice large caps, and valuations especially attractive, Growth (IWF) will see some headwinds from lower economic-growth, higher bond yields, and its higher valuations. But it is the ‘all-weather’ factor with the best performance in both up and down markets historically. Tech is the largest sector component. By contrast the best performers in down markets have historically been low volatility (SPLV), quality (QUAL) and dividend yield (HDV) factors. There largest sectors are respectively, consumer staples, tech, and healthcare. Dividend strategies will be supported by still recovering profits and company confidence and rising pay-out ratios. Those looking for a deeper-dive analysis on factors can see this compendium.
Energy and Financials are our favoured sectors. ‘Bond proxy’ defensives least. Tech is fine
Our favoured sectors for the year are cheaper and faster growing cyclicals, such as energy (XLE) and financials (XLF). They benefit from still high GDP growth and rising bond yields. Their cheaper valuations have more room to increase, but also give protection from a tightening Fed policy pressuring valuation. We are more cautious defensive and ‘bond-proxy’ sectors, like consumer staples (XLP) and real estate (XLRE). They are more expensive, with lower growth, and historically hurt by rising bond yields. Healthcare (XLV) would be a notable exception. We think big-tech (XLK, XLC) will be fine, though will not lead performance.
Gap between best and worst performing sectors and factors (S&P 500, %)
Source: Refinitiv.*eToro created collectible/hobby baskets of 6-8 simple-weighted stocks. World=MSCI ACWI index
Key Views
| The eToro Market Strategy View | |
| Global Overview | Forecast a very rare fourth consecutive positive year in 2022, with naturally lower returns and more volatility than last year. Main drivers of 1) GDP growth to remain well-above average, and supported by further vaccine-driven reopening. 2) Monetary policy tightening to be relatively gradual from very low levels, and inflation pressures to ease during the year. Focus on reflation and cyclical assets: equities, commodities, crypto, small cap, value. Relative caution on fixed income, USD, and defensive equities. |
| 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 | Equity markets helped by 1) a greater weight of cyclical sectors, and lack of tech, 2) 25% cheaper valuations vs US, 3) decade of under performance made under-owned by global investors. Helped by a dovish ECB to hold rates ‘lowfor-longer’, and multi-year €750bn ‘Next Generation’ fiscal support. A weaker EUR helps many companies, with 50%+ company revenues from overseas. ‘4th wave’ virus resurgence may provide additional buying opportunities. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China equities hurt by tech regulation crackdown, property sector debt, and slower GDP growth. But this is increasingly well-priced. LatAm and Eastern Europe have more upside to global growth recovery, a weaker USD, 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 | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | Consumer staples, utilities, real estate offer more defensive cash flows, less exposed to economic growth. Makes them more sensitive to rising bond yields. Expect them to underperform in a more cyclicals focused environment with earnings strong and yields rising. Healthcare is more attractive, with cheaper valuations and more growth. |
| 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 | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| 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 | Cross-currents of rising global growth conern on virus fourth wave, and stronger USD. But remain in ‘sweet spot’ of above-average GDP growth, ‘green’ industry demand, years of supply under-investment. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply. Gold hurt by likely rising 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 States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| Italy | Gabriel Dabach |
| France | Antoine Fraysse Soulier David Derhy |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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