August 2020: IG Smart Portfolios update: will US stocks continue to outperform?

Global equities rallied in August, with US stocks rising the most, again. But with technology stocks richly valued, what is the outlook for the sector over the rest of 2020?

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
August 2020: IG Smart Portfolios Update: will US stocks continue to outperform?

Equities: FTSE 100 +1.8%, S&P 500 +5.6%, MSCI World +5.0%, MSCI Emerging Markets +2.3%

Bonds: FTSE All Gilts Index: -3.0%

Currencies: GBP/USD -5.8%, GBP/EUR -0.7%, GBP/JPY -1.8%

Commodities: Gold -1.9%, Bloomberg Commodity Index +4.7%

A strong month for US tech, again

Global stocks saw strong gains in August as consumer discretionary and technology (+8.3%) stocks (+9.8%) helped to send markets higher.

The S&P 500 index (+5.0%), which tracks the Top 500 companies in the United States, hit record highs, propelled by the likes of Apple, Microsoft and other tech stocks, which now make up 28% of the index. The last time tech stocks held a similar weight was during the dotcom bubble.

Last months gains builds on a decade-long outperformance for technology stocks, adding further pain for value investors trying to find bargains in cheaper industries such as energy and financials. The table below shows returns UK investors would have received from investing in different sectors of the global market.

Figure 1: MSCI World sector returns since 2010 (GBP terms)

Sector Return Sector Return
Technology 581% Comm. services 171%
Cons. discretionary 406% Real estate 127%
Health care 315% Utilities 107%
S&P 500 index 288% Financials 102%
Cons. staples 212% Materials 84%
Industrials 210% Energy -13%

Source: Bloomberg

But is the recent correction in technology stocks the start of things to come?

The sharp selloff in stocks at the start of September has encouraged headlines suggesting we have seen the top of the market for tech stocks and are at the beginning of a prolonged decline in global stock prices. Although certain sectors do look rather expensive, we don’t think we will see another complete stock market rout as witnessed earlier this year.

This is likely for a few reasons. First, the recent correction has been largely in sectors that have seen gravity-defying gains since the start of the year: technology, consumer discretionary (Amazon), health care and communication services (Facebook and Alphabet).

In fact, the FAANGM stocks (Facebook, Amazon, Apple, Netflix, Google and Microsoft) have long been outperforming the rest of the S&P 500 index, with their weight in the index rising from 9% to 26.3% in under eight years. Valuations have become more expensive relative to the rest of the index. The S&P 500 index currently has a price-to-earnings ratio (P/E) of 22.9. Stripping out the FAANGM stocks brings this down to 19.4. Some pullback in the tech sector should be reasonably expected, then, given its recent, large outperformance.

Figure 2: FAANGM stocks weight in S&P 500 index

Source: Yardeni Research Inc

Another factor that may dampen prospects for the big tech names is if the coronavirus pandemic is brought under control and conditions for hard-hit industries like travel and hospitality start to become more favourable. One could typically expect some rotation into these less expensive sectors.

What’s more, the looming US presidential election may bring about increased scrutiny on a number of large companies involved in the recent antitrust misconduct hearings. From Amazon’s treatment of third-party sellers, to Apple’s handling of its App Store developers, the potential for large fines, threats of break-ups, or simply a drawn out period of uncertainty resulting in little or no action may spook investors.

The recent selloff could mark a sensible time to think about diversifying into other regions and sectors. European equities are currently priced at record low valuations relative to US stocks, while savaged UK stocks look cheap.

IG Smart Portfolios provide instant diversification

As a reminder, IG offer a range of five ready-made portfolios that are built and managed in partnership with BlackRock. These are low cost, with IG’s management fee starting at just 0.5% on the value of your investments and nothing charged on amounts over £50,000. Before you invest we ask you a series of questions to help you understand your risk profile to ensure you invest in a suitable portfolio.

In August, the more risk taking IG Smart Portfolios (those with a higher proportion invested in stocks) saw strong gains compared to their benchmarks that they seek to beat.

Figure 3: latest performance data for IG Smart Portfolios (net of fees)

July 2020 12m to July 2020
Portfolio Benchmark Portfolio Benchmark Difference Portfolio Benchmark Difference
Conservative 3m Libor +1% 0.0% 0.1% -0.1% 0.7% 1.5% -0.8%
Moderate ARC Cautious 0.4% 0.8% -0.4% 6.1% 1.2% 4.9%
Balanced ARC Balanced Asset 1.7% 1.6% 0.1% 7.1% 0.5% 6.6%
Growth ARC Steady Growth 2.7% 2.4% 0.3% 9.2% 0.1% 9.1%
Aggressive ARC Equity Risk 3.6% 2.9% 0.7% 7.7% 0.1% 7.6%

Source: IG, ARC

Our investment in US stocks at the midst of the coronavirus crisis has helped us to outperform and has put clear daylight between our portfolios and the benchmarks. Over the last two months our use of currency hedged exchange traded funds (ETFs) as part of our investment in international stocks has added to returns as the GBP has strengthened against other major currencies.

For the moderate to aggressive profiles we aim to beat the ARC GBP Private Client Indices. Over the last 12 months we have beaten these by an average +7.1%. The chart below shows our performance dating back to our launch in February 2017.

Figure 4: annualised returns (28 February 2017 – 31 August 2020)

Source: IG, ARC

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Publication date : 2020-09-10T12:39:03+0100

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