While stimulus, economic improvement and vaccination roll-outs are all very real and very positive drivers of markets, we have seen growing risk-seeking behaviour drive single stock price movements in a way that is uncommon. This requires real thought and some very active risk management to differentiate between fundamental change and the flow of funds towards improving themes and factors, which is often a feature of more mature market cycles.
As for the ongoing health pandemic, despite a marked improvement in vaccine distribution in a number of developed nations, the virus will remain in our world for some time. The movement towards better treatment, control and management of COVID is real, but sadly we will need to adjust around the virus and its consequences for some time to come. This does not imply negativity on our part with respect to outlook, but it does imply balance in our portfolio and a want to avoid excesses of sentiment.
The Biden administration’s emerging priorities are clearly very pro-growth and are set to create an intriguing clash between long-term and structural disinflationary forces and near-term inflationary impetus. Widespread stimulus has supported asset prices since the emergence of COVID-19, but the likelihood of rising corporate tax will at some stage matter to after-tax corporate earnings. This year will be characterised by some of the strongest profits growth figures in investing careers, but the time to look out to 2022 and 2023 is already upon us and durability of growth will remain a key offensive and defensive weapon within portfolios.
Recognising the challenging pushes and pulls in the market, we are trying to be balanced within the portfolio, keeping the overall portfolio beta near 1, while focusing on picking stocks within sectors as opposed to expressing large-sector bets. Under the surface, volatility at the single-stock level feels high, in part due to the very large dispersion of factors and the aggressive rotation away from growth towards value in 2021. While many bullish statements are being made over the prospects for a long-term value cycle, we feel the forward-looking environment on a style basis is now much more neutral, which is well suited for diversified stock picking.
Our largest overweight at a sector level is in consumer discretionary. In our view, there is tremendous change occurring within the sector due to coronavirus, and this has led to a dramatic demarcation between winners and losers. COVID-19 has pulled forward years of e-commerce share gains, and we have a diverse set of stocks levered to this trend, which we believe to be structural in nature.
Specifically because a number of secular growth companies may not deliver rapid growth in mid-2021 (when compared to their outstanding and COVID-influenced results of mid-2020), we believe there is a growing opportunity in the sector. Our perspective remains that the market is underestimating the profound effect the pandemic has had on the consumer landscape and the urgent need to have a competitive and differentiated product, matched by a competitive and differentiated digital presence. This perspective shapes our ownership of many stocks in the consumer discretionary sector.
To this point, we continue to hold a conviction position in Amazon. While many investors debate how much further the stock can run given its impressive performance over the years, we still think the company’s strong position in e-commerce and cloud computing, via Amazon Web Services, means Amazon is still well positioned for attractive growth versus the market level, with good durability.
To the point of growth durability at a reasonable valuation, we find ourselves in a position of leaning into some of the scepticism surrounding large-cap Technology names, in an environment that has been defined by an aggressive rotation towards Value and the r-opening theme. Key positions we find to be attractive on both an earnings and valuation dimension include Alphabet and Facebook, while Zoom remains one of our top holdings given our view on the persistency of videoconferencing as a medium of communication.
Overall, this is a market that remains one defined by rapid change and a good dose of uncertainty, both of which require a disciplined focus on valuation and earnings fundamentals, in our view. With these principles being deeply embedded within our investment process, we remain encouraged by our portfolio holdings and their long-term ability to deliver durable growth to our clients.
Scott Berg, portfolio manager, global growth equity strategy, T. Rowe Price
