Why Investors Are Buying Beaten Up Assets

Investors are bidding up previously underperforming asset classes, such as commodities, currencies, cyclical stocks, and emerging market stocks. The bargain hunters are betting that the global economy is bottoming out, based on signs that the U.S. and China are finally resolving their trade conflict, stimulative interest rate cuts by major central banks, and rising hopes for an orderly Brexit, per a detailed report in The Wall Street Journal summarized below.

“We think it’s time to deploy money into markets broadly,” says Olivier Marciot, senior vice president at investment management firm Unigestion. “It’s like a baby Goldilocks environment," he added, referring to solid economic growth, low inflation, and low interest rates.

Significance for Investors

Candice Bangsund, a portfolio manager at Fiera Capital, is another optimist. “There are some early indications that the worst may be behind us and the global economy is finding a floor,” she said. She is encouraged by a three-month upswing in the JPMorgan Global Manufacturing Purchasing Managers’ Index, and by reported progress in U.S.-China trade negotiations.

The British pound has risen by more than 6% from recent multiyear lows, and a variety of currencies are up in tandem with a rebounding Chinese yuan. Emerging market stocks had a steep selloff earlier this year, but have recovered since then. The iShares MSCI Emerging Markets ETF (EEM) dropped by 13.6% from a high in April to a low in August, but is up by 12.0% since then. Among commodities, there has been a broad rally including oil, copper, and coffee, to name a few.

Another indicator of increased bullishness about the economy is a rising yield on the 10-Year U.S. Treasury Note. From a low of 1.43% on Sept. 3, it closed at 1.92% on Nov. 11. Other safe haven assets that were up earlier in the year, such as gold and the Japanese yen, also are down recently.

Cyclical U.S. stocks are seeing increased demand from investors, and have outperformed recently. For Q3 2019 through Nov. 11, the S&P 500 industrial sector is up by 5.20% and the S&P 500 financial sector has gained 5.94%, versus a 3.70% increase for the entire S&P 500 Index, per S&P Dow Jones Indices.

Bank stocks also should benefit going forward from revived investor interest in value stocks, Barron's reports. Despite being vastly healthier than they were prior to the 20o8 financial crisis, their valuations are still much lower than they were back then, even after enjoying recent boosts to profits from tax reform and deregulation. The forward P/E ratio for the S&P 500 financial sector was 12.6 times projected next 12 months' earnings, versus 17.5 times for the full index, making it cheapest of the sectors, per I/B/E/S data by Refinitiv as of Nov. 6 and reported by Yardeni Research.

Looking Ahead

Morgan Stanley remains a leading pessimist among major investment firms. "We lean defensive as we expect pressure on earnings," according to their current Weekly Warm Up report. Regarding recent "excitement" about rebounding purchasing managers' indices (PMIs), they believe that "the rebound may already be fully priced." They also warn that, rather than being "a definitively bullish signal on future growth," much of the recent rally in asset prices actually may have been "due to excess liquidity provisions from the Fed and ECB in particular."