Spike in inflation to ease
Demand surge and supply shortage, which was partially caused by Suez Canal incident and bottlenecks in seaports, resulted in the unexpectedly high inflation in the US, which reached 5%. This immediately caused concerns over the rates hikes and have sent stock market back into the uneasy mood. However, we do not see this level of inflation to be sustainable as the supply shortage should ease and so should spike in the demand.
In contrast to the situation in the US, in Europe and Japan there is no evidence of the inflationary pressure as the economies have not yet recovered completely, the demand is still weak and service activities have not picked up yet.
In case the inflation is here to sit for a relatively long time, which, we believe, is very unlikely, stock investing сould provide a certain hedge against it. This is particularly true if the funds are invested in companies that can easily pass their costs to the consumers, i.e. they have strong economic moats as evidenced by high profit margins.
Fig.1 Consumer prices, Y/Y change
Source: Alphinox
Meme stocks
The topic of meme stocks that is attracting so much attention of retail investors and causing such losses to the short sellers in the first half of 2021 that, given its vast spread in the social media such as Reddit and Twitter, as well as widespread FOMO among retail investors, it will likely continue disrupting some parts of the market.
Pump and dump strategy that focuses on the stocks of almost bankrupt companies worked out well for many: this year GameStop returned 1036%, AMC Entertainment was up +2574%. According to Goldman Sachs, retail investors’ favorites doubled since June 2020, while the short-sellers’ targets brought hedge funds only 28% return. However, this new strategic trend can hardly be followed by the investors favoring sustainable long-term investments, knowing it implies huge uncertainty and potential for abnormal losses. We have covered this topic in detail in our February insight.
Value vs. Growth – who will get the laurels of 2021 best performer?
Cyclical stocks, where you often find value style representatives (e.g. energy and financial sector), have rebounded sharply in February and March this year, leaving growth stocks behind. However, June turned out to be a revanche month for the latter, as this was when they doubled down on catching-up game. Where to the scales will shift at the end of the year is still an unknown variable, depending on how the COVID – 19 situation unfolds and if we see further lockdowns due to Delta variant spread.
The known variable though is that the market will continue to recognize strong quality companies, which are able to generate earnings growth and keep convincing development pace in every market environment. Currently we see that the overwhelming majority of this type of companies are found among the growth stocks, so we put our bet on the growth style as a possible winner this year.
Fig.2 Value and Growth style monthly performance in 1H 2021
Source: Alphinox
