The U.S. Reopening: A Brief Guide for Equity Investors | Lord Abbett
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Market View

Lord Abbett experts discuss the potential implications of a vaccine-led U.S. economic rebound for select areas of the equity market.

Read time: 4 minutes

 

 

Back in August, Market View offered two “brief guides” for equity and fixed-income investors about the potential investment implications of the 2020 U.S. election. In April 2021, we think it’s time for a follow-up: a pair of updates focused on another topic of major importance to financial markets, the much-heralded “reopening” of the U.S. economy. With the pace of COVID-19 vaccinations quickening, stimulus funds flowing across the United States, job growth accelerating, and consumer and business sentiment rebounding, investors are anticipating a strong snapback in economic activity after the pandemic-led weakness of 2020.

What might that mean for key asset classes as 2021 progresses? For this week’s guide, we surveyed Lord Abbett equity investment professionals for their viewpoints; our roster of experts included Partner and Portfolio Manager Thomas O’Halloran, and Portfolio Managers John Hardy, Alan Kurtz, and Jeffrey Rabinowitz. Our survey will conclude next week with further insights from Lord Abbett investment leaders on the reopening’s implications for key segments of the U.S. fixed-income market.

Innovation Growth Equities

We have continued to keep our eye on the pace of COVID-19 vaccinations, which, as of mid-April, had reached nearly 122 million Americans—some 46% of the eligible population.1 We have also monitored the potential impact of government stimulus programs, including the American Rescue Plan (ARP) enacted in March. Against this backdrop, we believe innovation growth opportunities continue to be abundant. The starting point is technology—for example, the semiconductor and software companies that have enabled the exponential growth of processing power, or those firms commercializing advancements in cloud computing and artificial intelligence.

We are also focused on the consumer sector, especially those companies with products and services that help address the hierarchy of human needs and improve the lives of millions of people, and those areas where technology serves consumer preferences in things like social networks. We are also finding opportunities in healthcare—in biotech, devices, and diagnostics; and in digital-payment technologies and platforms, where existing growth trends were intensified by the pandemic.

That said, we will be keeping an eye on the direction of interest rates and inflation. But right now, we believe the market’s recent strength can potentially continue, especially with supportive monetary and fiscal policy from Washington. Also, widely followed market indicators such as breadth—a measure of the number of stocks participating in a market move—remain favorable, in our view. People were worried a few years ago about just five stocks carrying the whole market. Now we have hundreds of stocks driving the market.

Durable Growth Equities

As we emerge from the pandemic, we see several opportunities among the companies we follow. While we don’t wish to oversimplify things, we think there are three buckets of companies where we're finding opportunity.

The first is companies that benefited from social distancing. We still see attractive candidates in this group, even after their strong performance in 2020. We think the key to identifying value among the “work-from-home” names and social-distancing beneficiaries is to make sure that the improvements those businesses saw were structural in nature, that the growth is still sustainable, and that when you factor in those types of dynamics, that the business is still reasonably valued.

The second is companies that were negatively impacted by social distancing—think of travel and leisure, aerospace, and other industries that saw a significant reduction in business from the pandemic. We see opportunity among these firms as the reopening could potentially enable those businesses to improve.

Finally, there are those businesses that may not have felt much of a positive or negative impact from social distancing, which could describe many stable-growth and very durable businesses that we think may be a bit forgotten. Remember that last year, as the lockdowns took hold, investors were more focused on readily identifiable pandemic themes—seeking social distancing beneficiaries like the work-from-home names. Now, a lot of investors are looking for the potential reopening winners, and once again, some of the durable businesses may not get the attention we think they deserve. We see plenty of opportunity in attractive companies that are reasonably valued and that occupy that middle ground.

To wrap up the reopening theme, there are a lot of examples of businesses that looked at the pandemic and the challenges they faced and did some restructuring—took some costs out of their businesses to prepare for the impact of the pandemic. In a lot of cases, companies are telling us that while business may not necessarily come back to pre-COVID levels, a reasonably strong rebound may still enable them to post record earnings and profits.

Value Equities

We believe our value franchise is largely positioned well to benefit from the reopening and the reflation trade. The combination of both accommodative U.S. monetary policy and government support, coupled with a faster-than-expected vaccine rollout has resulted in a material upgrade to 2021 GDP growth forecasts. As a result, the market has rotated to more economically sensitive areas such as industrials, energy, and materials, which have been a tailwind for value. Further, the increase in interest rates has helped financials outperform this year. These areas of the market make up a large part of the value indexes and thus have contributed to the recent outperformance.

We are optimistic that the recent rally can continue because of the additional stimulus and a strong growth outlook. We continue to maintain a favorable outlook on financials, as we believe the sector last year was unduly punished, and valuations are still attractive. We also favor the housing market, as fundamentals remain strong due to low housing-inventory levels, and the COVID-19 pandemic has acted as a catalyst for population migration from urban to suburban settings.

Convertible Securities

Last year, during the worst of the market volatility, a lot of stocks appeared to be priced for something pretty close to bankruptcy. But then, a lot of those companies found ways to raise capital and get themselves a greater cushion to make it into this year and into 2022. Convertibles played a big part in that, as evidenced by the surge in new issuance during the year. Many of these companies were also able to turn to secured lending, and, when they recovered smartly from their worst levels, were able to issue equity as well.

So where does that leave us now? We're really encouraged by a lot of what we're starting to see. With the rollout of COVID-19 vaccines, passenger volumes, as measured by the U.S. Transportation Security Administration, have risen significantly in recent months. Online travel agencies are seeing a lot of activity, and for anybody that's tried to book a flight recently, you’ll notice that a lot of passenger capacity has been taken out as airlines adjusted their operations to the pandemic. And the airlines are very good at extracting price when and where they can get it. So, we think there's pretty meaningful upside to earnings estimates in the near term for a lot of these consumer-facing industries. And, relative to the Wall Street forecasts that are out there now, we think that improvement happens sooner, and at a much greater magnitude, than what estimates are calling for right now.

Next week: A look at the U.S. reopening and fixed-income investments.

 

1Based on data cited in the Washington Post on April 15, 2021

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.

This material is provided for general and educational purposes only. The examples provided are for illustra­tive purposes only and are not indicative of any particular investor situation.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

A convertible bond is a fixed-income instrument that allows the holder to convert the bond into equity under specific conditions. The basic structure of a convertible bond gives the holder the option to hold the bond until maturity and receive cash par value, or to convert the bond into a specified number of shares of stock of the same company.

Gross Domestic Product (GDP):  The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.   

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in Market View are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research, or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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