Monthly Agenda August 2020 – International Equities
The S&P 500 finished August in the black for a fifth straight month on optimism a vaccine for the virus may be around the corner. If markets are right about a V-shaped recovery founded on fast-track approval of vaccines or newer, effective treatments, then Treasury yields are likely to snap out of their current doldrums. While that has not happened so far, stocks can’t continue to rally endlessly and yields stay put. When yields snap out of their stupor, the correction will be quick and sharp, which may then allow the curve to settle into a new orbit (witness how the 10-year yield has bobbed around 0.65% for months now). When a new equilibrium is found in rates, the higher yields will warrant a re-assessment of the required return on stocks.
Chart 4: Bonds can’t ignore the push higher from equities foreverEnlarge Source: Bloomberg
Emerging market equities are struggling to erase their 2020 losses. Hopes of a vaccine may be enough to do it given how badly hit emerging markets were by the virus.
Analysts have upgraded earnings estimates in emerging markets by 6.6% since March. But they’ll have to raise them another 33% even to justify the current stock prices, based on average valuation.
Can it happen now? Such growth in profit projections were seen during 2009-2011 and 2016-2018. But those spikes were backed by economic growth rates ranging from 4% to 7%. This year, emerging economies are projected to shrink 1%, then recover to 5% next year.
Chart 5: EM equities battling to erase 2020 lossesEnlarge Source: Bloomberg
Apple’s scheduled 4-for-1 stock split on Aug. 28 portends changes in the Dow Jones Industrial Average. Apple’s 12% weighting in the index calls for a change in the divisors, to adjust to the post-split stock price. The Dow is compiled by adding the stock prices of all 30 companies, then dividing by a factor set by the owners of the index, S&P Global. The factor is adjusted when a stock splits.
The changes are also designed to steer the index, founded in 1896, to better reflect the U.S. economy. The exit of Exxon Mobil ends a run that began on Oct. 10, 1928, when Standard Oil of New Jersey joined the broad market average. Software giant Salesforce.com will assume Exxon Mobil’s 1.32% weighting. The changes are effective prior to the opening of trading on Monday, Aug. 31, 2020.
Chart 6: Dow Jones vs AppleEnlarge Source: Bloomberg
Chief Investment Officer