Written by Norman Isaac Mwambazi

Stimulus package fuels global stock market shake-up, bank stocks rally as last year’s top performers stumble

Last week, US President Joe Biden signed into law the $1.9 trillion that was passed by the US Congress, and …

Last week, US President Joe Biden signed into law the $1.9 trillion that was passed by the US Congress, and millions of people have since received the promised $1,400 stimulus checks directly deposited into their bank accounts.

This money pumped into the economy, together with other fiscal plans involved in the bill has fueled a powerful shake-up in global stock markets, and it has boosted shares in companies that were shunned during the height of the pandemic after posting negative earnings results.

The benchmark S&P 500 is mostly smoothly pushing higher, as it has done for months but some tech stocks, have dipped. On the other hand, long unloved sectors like banks and energy companies are currently taking the lead, dominating markets from the New York Stock Exchange (NYSE) to the London Stock Exchange in the UK and the Frankfurt Stock Exchange in Germany.

The stimulus package, together with the rollout of the COVID-19 vaccine both in the US and around the globe as well as the reopening of the world’s major economies will kick off a different phase in markets to the rally of the past year.

Investor interests shift

There has been a shift in the way investors pick up stocks in recent months. It hs become evident that investors are getting more interested in the stock that struggled through the COVID-19 pandemic for the bigger part of last year.

This includes banks, which are considered particularly sensitive to fluctuations in the world economy. MSCI’s index of shares in lenders across global developed markets soared nearly 30% in the final three months of last year and has added another 20% in 2021 so fr.

The strong run for banks highlights the shift in investors’ outlook partly influenced by the Biden administration’s plan to pump money into the US economy as a whole and into the individual pockets of many Americans. Last week, Biden announced that he seeks to bring a sense of normal back to America by July 4, which reinforced this perspective.

Investors are expecting growth and inflation in the US and around the world, and this has pushed borrowing costs sharply higher and in the process, it worked out to the advantage of banks that had struggled as central banks cut interest rates last year to prop up economies after the collapse in output caused by the pandemic.

Banks aside, investors have also picked massive interest in sectors such as materials, consumer goods, energy, commodities, and industrials in recent weeks, sending prices higher as well.

All these sectors have done well lately. A diverse group of economically-sensitive companies like lender Wells Fargo, oil major ExxonMobil, miner Freeport-McMoRan, heavy machinery maker Caterpillar, have posted lofty gains.

UBS Asset Management Director of macro asset allocation strategy Juha Seppala said:

“Last year, growth was scarce and growth stocks were doing well, and now growth is abundant and the most underpriced stocks are the ones that are doing well. This year, that rotation is going to continue and value is going to outperform growth.”

MSCI’s global value index has risen 8.7% since the start of the year and reached an all-time high last Thursday. This marks an adjustment from last year, when the index fell 3.6%, widely trailing an MSCI barometer of rapidly growing companies that soared 33%.

The MSCI tracks companies that trade at low levels compared with measures of their fair value.

2020s performers are dipping

Last year’s star performers like automaker Tesla Inc., at-home fitness group Peloton, graphics chipmaker Nvidia, tech giant Apple, e-commerce and cloud services provider Amazon have stumbled from their all-time highs they were at last year.

Value funds, which are often heavily invested in some of the sectors that were hit hard in the past year, have also seen a flood of new money.

US-domiciled open-ended and exchange-traded value funds (EFT) tracked by Morningstar Direct recorded $6.3 billion in net inflows in February alone, up from $1.3 billion in January 2021, after almost a full year of net depletions throughout the pandemic. Growth funds sustained $18 billion in net outflows in January, before pulling in $3 billion last month.

Michael Lewis, head of US equity cash trading at Barclays noted:

“People rotating out of large-cap growth and momentum and into these more value, cyclical-type factors […] has definitely ramped up. It has become something that everybody’s focused on in the past two months.”

European markets

Juliette Cohen, the investment strategist at Paris-based CPR Asset Management, expressed similar optimism about Europe’s old economy companies saying that those that are exposed to global markets “are really exposed to the reopening trade.”

Europe’s Stoxx 600 equity benchmark has risen 6% so far in 2021, putting it within touching distance of its pre-pandemic high last February. The industrial goods and services subsector of the index, which comprises companies such as German conglomerate Siemens and aircraft manufacturer Airbus, has risen 8%.

In the UK, the FTSE 250, a domestically focused index with heavy weightings of financial, industrial and consumer businesses is “about the purest reopening trade in the world,” noted Savvas Savouri, partner and chief economist at Toscafund, a London-based hedge fund.

The index is up 5% in 2021, adding to a climb of around a quarter in the final three months of 2020.

“It is all companies that need bodies to be moving around the economy. You have brick makers, housebuilders, retailers, restaurants. It is literally bricks and mortar,” Savouri said.

Goldman Sachs Asset Management is also looking at pockets in the technology sector to play the reopening trade.

“So, not your Amazons, the Facebooks or Apples, but rather the companies that are making all the chips and make the semiconductors,” said Tim Braude, a senior investment manager at GSAM.

He added, “From our perspective, it’s not too late to get in. We think that we’re just starting.”

Photo by the Financial Times.