Now is the time for institutional investors to buy value, small cap and cyclical stocks and hold steady while the economy builds back, says Bill Callahan, an investment strategist at Schroders.
Indeed, energy and financial sector stocks saw gains Monday as investors are rotating from growth and large cap stocks after Moderna Inc. released data showing its vaccine is 94.5 per cent effective in preventing the coronavirus. The biotechnology company’s news follows Pfizer Inc. and BioNTech’s announcement last week that its vaccine shows 90 per cent efficacy.
Despite continued uncertainty south of the border — with outgoing U.S. President Donald Trump still refusing to concede to President-elect Joe Biden and a still fuzzy vaccine timeline — Callahan is bullish on value investing.
Although hope is on the horizon, uncertainty about distributing a vaccine remains. It’s unclear how long it will take to vaccinate every person or what percentage of the population will opt for it. But Callahan advises institutional investors not to focus on those details; instead, he says they should consider the fact there will soon be a definite solution to the pandemic that’s slowed down the global economy for most of 2020.
The timing is right to return to active management and stock picking, he notes. “If the economy is getting better, we should reduce exposure to growth stocks and think more about value stocks.”
As the economy starts to grow, fiscal and monetary policy stays loose, a vaccine becomes available, people start spending again and businesses open up, Callahan expects plenty of growth to go around for stocks hurt during the downturn. Investors won’t have to pay astronomical prices for growth, he adds, so they’ll eventually rotate out of those sectors and into longer-term value, small cap and cyclical stocks.
However, these stocks are priced for the current reality, which won’t last forever, he says. “People are going to start flying and eating out, going on vacation and shopping again, which will be great for retail, real estate and consumer stocks.”
If people go back to even 75 per cent of what they were doing prior to the pandemic, these stocks will still perform well, says Callahan, noting investors have long questioned what catalyst would send investors back to value from growth stocks and these latest vaccine announcements could be it.
“Even if it takes until the middle of next year to get the vaccine to people globally, it’s a relief for the market. . . . There’s light at the end of the tunnel and now is the time to go bargain hunting.”