The recent key breakthroughs in the fight against COVID-19 has caused an ‘unprecedented’ rotation in stocks – and I fear this could catch investors off guard.
Market rotation is the counter movement by traders from one equity class or sector into another.
Optimism driven by progress towards a COVID-19 vaccine has prompted many investors around the world to ditch many of 2020’s high-flying stocks - the ones that benefitted from the impact of the pandemic - and buy ones that were beaten down by coronavirus.
In the last few days there’s been a historical, violent rotation from growth and momentum stocks, like stay-at-home tech, to value funds, including financials and industrials, as a result of the positive vaccine news.
Hopes for a potential vaccine are legitimate and the developments are, without question, positive news for humanity.
However, The Great Rotation could be misguided.
Investors might be looking ahead to the post-pandemic era with a virus-free economy, but the world, the global economy how we live, do business and interact remains fundamentally changed.
It is doubtful the world will go back exactly to how it was pre-COVID – there are many aspects of the ‘new normal’ which people like and support. As such, some of the major shifts are unlikely to be reversed.
The remote working phenomenon is one example. Even if 20% of office workers return to the office fulltime, the change is working patterns is monumental.
Other examples include business travel being replaced with videoconferencing, and online retail - people have fallen in love with it. Will they all suddenly go back to the stores? Then there’s the use of apps for everyday tasks such as banking, also for healthcare and medical analysis, amongst many other things.
In many ways, Covid-19 simply accelerated the growing trend that existed before towards consumer convenience, for 24/7 access, and on-demand.
Therefore, dumping stocks that support these major societal and economic seismic shifts in favor of so-called recovery stocks might catch investors off guard.
In addition, the roll-out of a mass global vaccination agenda will be a lengthy process and will face an uphill logistical struggle, plus there are vaccine sceptic concerns to address.
The best way for investors to position themselves for the opportunities and to mitigate risks is to have a broad spread of investments, and not to try to second guess the market.
Nigel Green is founder and CEO of deVere Group. One of the world’s largest independent financial advisory organizations, de Vere does business in 100 countries and has more than $12 billion under advisement.
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