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Key Points
- Many of the leaders in 2020 could be laggards in 2021.
- The most expensive cohort within growth could be the riskiest part of the market.
- Mean reversion in lagging consumption categories could have a resurgence in 2021.
2021: The Forgotten & Ignored Could Wake Up.
As human beings, we consume from the day we are born until the day we pass. Personal consumption is the largest and most predictable phenomenon there is. Seven billion people spending money to acquire things they want and need always offers interesting investing opportunities. Sometimes, however, certain spending categories become more important than others. Example: in economic slowdowns, the staples of life tend to be a focus and in boom times, more discretionary spending offers a better investment opportunity. Additionally, our spending is largely dependent upon our age, our income, our personal tastes and habits and how we are affected by our peer group preferences. We capture these changing consumption trends via the index we manage called the Alpha Brands Consumer Spending Index. We recently updated the top 200 brands index and are excited to have 200 great brands from over 70 consumption categories at our disposal for investment purposes. The themes we have chosen to focus on as we head into 2021 are somewhat different than those we anchored to for the bulk of 2020. As investors, we are always looking for the next big winners and attempting to identify and distance ourselves from the most crowded trades. We want to skate to the places where the puck is headed, not where it has been. That’s not to say we will exit from important consumption categories all together. E-commerce, for example, will always be a portfolio focus but as the global economy attempts to get back to “normal”, our interest in being out and about warrants additional allocations. The team and I spend a lot of time identifying which consumption categories could see a greater portion of the customer wallet and what areas of consumerism are pent up and due for an inflection point.
Because of the global pandemic, our 2020 consumption focus was narrower in scope. As the global economy begins to heal, consumption spending should expand to more categories offering investors significant new opportunities in 2021. Significant pent-up demand exists across important social gathering industries. We expect the most relevant brands serving these areas to recover nicely over time. Many newly formed consumer habits will become permanent and others will mean revert back to prior norms. Below, I have listed the areas we are focused on heading into 2021.
The Most Expensive Cohort of Growth Stocks Offers More Risk.
Equity markets move in cycles. Once a dominant trend in a particular “style factor” is cemented, the trend tends to continue until it gets excessively stretched or it comes into contact with an outside force. From an investment perspective, understanding dominant trends and how likely they are to mean revert is just as vital as understanding which stocks to own within the dominant style factors. 2021 should prove to be an interesting year from a style factor perspective. This is the first year in recent memory that I believe will be somewhat different than what the dominant trend has been for many years. As 2020 comes to an end, the most impressive growth-oriented stocks have become extremely expensive and the year-over-year earnings comparisons will be high making it very difficult to “comp the comps” for many stocks. When the rubber band gets stretched too far, it usually stretches back just as hard before it normalizes. That could be what’s in store for the most expensive part of the equity markets. For the last 5 years, the large growth stocks have been having the most fun, particularly relative to value stocks.
If the economy can find its footing and unemployment can begin to normalize lower, interest rates could begin to rise, putting pressure on the most expensive part of the growth complex. As you can see, the wide difference in performance between growth and value stocks is about as large as it ever gets. That doesn’t mean value has to go up and growth has to go down but it does mean more balance is likely prudent.
2021: The Year of Balance.
Whether we like it or not, the year-over-year comparisons of company fundamentals matter from a forward returns perspective. A small sub-segment of high growth, exponential innovation-focused stocks with historically high valuations have had a remarkable year of performance in 2020. There’s only so much juice one can extract from the fruit. Very few of these companies will have as good a year next year as they did in 2020. When growth and momentum investors do not get what they want, all but the fully committed tend to run through a narrow door together. Their exit from these stocks is neither quiet nor orderly. A smoother and more normal economic situation could be the catalyst that drives laggards to become leaders.
Timing trend changes is very difficult and often a fool’s errand. They rarely ring a bell at the top or bottom of trends but when the signs start piling up the prudent investors at the party begin to pack up their things and move closer to the exit door. Emotionally speaking, that can be difficult at times because whether we will admit it or not, over time we get emotionally connected to some of the investments and gains we receive. Here’s the fun part: the most admired brands are not just growth stocks; they are a collection of high-quality businesses that span across all sectors and over 70 industries and are categorized as growth and value stocks. Many of these brands play vital parts in our lives. From an investment perspective, some hold defensive qualities and some play offense and/or special teams. In aggregate, the 2021 Brands 200 Index constituents allow our team ample investment opportunities no matter which style factors emerge with momentum in the coming year.
No one knows the future, but I suspect value stocks perform well versus growth stocks and recovery industries perform well versus stay-at-home industries. Below, I have listed the consumption categories we see value in as we begin 2021. As always, these decisions are subject to change as the data changes.
As a global consumption investor in 2021, a broad array of spending categories holds significant opportunity. From a thematic perspective, our focus is on identifying the lifetime spending categories that have strong secular tailwinds as well as identifying important mean reversion opportunities that should experience strong recoveries from a difficult 2020. Sometimes the best returns are generated when company fundamentals go from historically depressed to slightly less depressed. We have identified many of these industries and brands and are excited to see what 2021 has in store.
Thank you all for your engagement in these blog posts and our team at Accuvest wish you a healthy and happy holiday season. May we all have a wonderfully “back to normal” 2021!
SUMMARY:
- 2021 could be a laggard to leader year in equity markets.
- Growth stocks, particularly the most expensive decile, could struggle with difficult comps.
- Equity portfolios more balanced with regard to style factors should have a better year in 2021.
Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.
