For the first time in modern history, we’ve experienced total economic lock-down and yet, looking at the most popular index worldwide – S&P 500, we can easily conclude that the global economy quickly recovered from pandemic impact. Even more, the economy did not just recover – S&P500 is currently at its all-time highs! And now one question comes to mind. What logic do we follow in asset allocation and should we invest in equity at all-time highs?
If we go by the assumption that the country’s equity index fairly represents real economy (real economy including expected cash flows), we can conclude that most of the global economies have on average already surpassed levels of pre-pandemic output. Naturally, some of the sectors have excelled, while others are still weighed-down by pandemic consequences like supply shortage and supply-chain disruptions. Now, the next logical question appears. Do we wait for the contraction and ‘discount sign’ on capital markets’ instruments or is the opportunity cost of waiting, in terms of yields, too high? So, should we keep investing even if we are buying them at all-time high (‘ATH’)? Which side of the coin “wins”?
To get to some objective conclusion, we need to look at what historic data tells us. Looking at S&P500, as an obvious answer for choosing the representative sample for global capital markets, we came to some insightful data. We tested what percentage of time, after previous all-times highs are broken, S&P500 stays in the all-times highs zone. Does it contract soon after ATH was broken and “corrects” itself or does a bull run last? We wanted to clarify that the simple economics logic of waiting for the correction and ‘buying the bottom’ unfortunately does not apply to efficient financial capital markets.
For this analysis we looked at the historical prices for S&P500 in the last 10 years, from 2011 – 2021. We do, however, point out that this period coincides with the longest bull run in history. From the comparison between previously reached ATH in 2007 and prices on observed period (last ten years), one can notice that S&P500 stays in all-time high zone for the 48% of the time. This information itself should be enough for a rational investor to conclude that always being in the market is a preferred way of investing. To be more precise, we should look at the price time-point when the previous ATH was breached, up until the end of 2021, which happened in March 2013. In the period after breaching the previous ATH until the end of 2021, S&P500 spent app. 60% of the time in the all-time high zone.
S&P500 performance (2011-2021)
When looking at the region, the conclusion does not reveal the same rationale. Regional indices do not follow the same pattern of movement as S&P500. But nevertheless, we find the region attractive in terms of valuation, while on the other hand, it has a much smaller international investor base due to liquidity constraints. Exposure of indices by sectors on regional markets differs strongly when comparing it to global markets like US or Germany. Still, we think that it holds a couple of hidden gems that could be added to the portfolio either by cherry-picking method or simply by buying the index via ETF’s. Just as S&P500 had its mentioned rally, few of regional gems have seen their prices surge recently. Some of these stocks currently stand on their monthly all-time high. Now the ultimate question is whether the growth will continue above their all-time high values?
In Croatia, some of the companies with a high weight in CROBEX have made significant capital gain returns for their shareholders. In the last quarter of 2021, Končar’s share prices hiked 24.1%, Atlantic Group’s share price hiked 12% while Podravka increased 6%. These three companies together have 32.7% share in the index which is currently traded at P/E of 14.7x. Such a P/E can arguably be explained by a higher weight of tourism and hospitality sector which holds app. 21% in the index. In our opinion, Croatian tourism is in for an excellent summer season this year, and we expect virtually all companies to show YoY growth in 2022.
Slovenia witnessed similar growth. In 2021 SBITOP increased 39.9%. This increase is mostly driven by the financial sector, as financials hold up to app. 65% weight in SBITOP. In the last quarter of 2021, NLB, Triglav and Krka returned 9.5%, 5.7% and 5.4%, respectively. Petrol, which has 22.3% weight in SBITOP, yielded 13.4%. Also, higher expected bond yields in the following period should positively influence already mentioned heavily weighted financials – both banks and insurances. Therefore, we find that SBITOP, which is currently being traded at a P/E of 7.7x, to still be quite attractive.
Last quarter’s capital gains of few Regional Blue Chips
To conclude, looking at global markets, it seems that investors should not “time” the market and wait for it to correct itself. Rather, they should constantly be “in” the market because the opportunity cost of waiting, in terms of real yields, could be unjustifiably high.