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Why The Rotation Into Value/Reopening Stocks Is Short-Sighted

While it is always prudent to periodically trim holdings that may appear overvalued, recent selling seems indiscriminate. Will you cancel your Amazon Prime membership just because the pandemic is over? Of course not. Is a healthy economy as detrimental to internet firms’ bottom lines as recent market action suggests? China’s experience tells us that commerce will continue to move online.

Global vaccine rollouts, the lifting of social distancing restrictions, and the passage of a significant US stimulus package have led to surges in demand for commodities and brick-and-mortar sectors such as airlines and hotels. This about-face has been disorienting as these stocks are much different than 2020’s market leaders: growth and technology stocks.

The 2020 rally in growth stocks in both the US and China was fueled, in part, by low US Treasury yields. While monetary policy remains unchanged, rising US Treasury yields are having a negative effect on growth stocks as investors must discount potential future earnings at a higher rate.

Accompanying this effect are retail investors, who accounted for 25% of US trading volume in 2020 compared to only 10% in 2019.1 Work from home has also meant trade from home. This is not unique to the United States and is occurring globally. Many investors are selling past winners to fund their purchases of value, cyclical, and reopening stocks. This trend has been especially pronounced in China over the last several weeks as investors have been pivoting all at once.

Cyclical, value stocks may continue to rebound globally on a wave of positive US economic data in the coming weeks and months. Economic data tends to be presented in year-over-year comparisons, which will mean a low bar to exceed, making these stocks appear attractive, though this could be a distortion of reality.

We believe, pandemic or no, the portion of the economy that occurs online will continue to grow. China, the first country to experience an outbreak of Covid-19 and the first to recover, demonstrates this fact. China’s largest internet firms continue to grow revenue despite reopening.

China has proven that online consumption can thrive without a pandemic.

Although quarantines largely ended in China in mid-2020, the country’s largest internet firms continue to deliver on revenue. The steady rise in consumer spending and the portion of that spending done online may continue to benefit these firms.

As seen above, recent swings in these companies’ stock prices are not based on any earnings event. It is also important to note that these revenue growth figures are not dependent on the pandemic as they compare Q4 2020, when the pandemic had already subsided in China, to Q4 2019.

The global pandemic has dominated the news cycle and our global psyche for over a year now. So much ubiquitous coverage of this single topic has made it hard to look beyond the present. Even at the pandemic’s end, we are still unable to look farther out. March’s unilateral dumping of growth stocks in favor of reopening sectors such as energy, materials, and industrials exemplifies this nearsightedness. We believe the recent volatility in internet and growth stocks, in both the US and China, is creating opportunities to invest in companies that represent the future of our economy.

As the below charts demonstrate, we have been here before. Timing is difficult in any market, and China is no exception.


  1. Winck, Ben. “Retail traders make up nearly 25% of the stock market following COVID-driven volatility, Citadel Securities says,” Markets Insider. July 9, 2020.