Even in normal years, August can be a difficult month for investors. Volatility is unconstrained by much fundamental company news - headlines are filled with politics and currencies. And holidays typically reduce thoughtful economic and company analysis. Can we expect a rational stockmarket this year?
Initially, as shares began their rebound in late March, little analysis was needed. The market was oversold and it was clear some sectors were well placed to cope. Many challenged businesses in travel and consumer services were able to re-capitalise and investors seemed willing to accept a bad year. After the recovery in growth stocks, cyclicals and “value” joined in the rally from mid-May. All boats were lifted on a rising tide of optimism.
But now, discrimination is essential. Investors are beginning to pay attention to valuations of growth and individual company prospects in troubled sectors. Ratings of some growth businesses will not tolerate any stumbles. And confidence in a quick recovery for cyclicals is giving way to the reality of ongoing hotspots and lockdowns. The new nervous normal makes some businesses almost un-investible. Investors quickly supported cash-calls in travel, retail and leisure – but some of those follow-on investments are already looking hasty. Outside the boom in technology, investment confidence is low.
The summer seems to be bringing realism into “value”. The biggest problem area seems to be traditional banking, now operating in a world where credit assessment is very difficult. Temporary government schemes such as furlough, combined with cheap money and much short term forbearance on tax and rents, confuse credit. In personal lending and SME borrowing, bankers will find it hard to assess the true financial position of more companies and individuals. It leaves a confused outlook for the banking sector.
Prospects are clearer in other areas, particularly growth businesses, consumer staples and many traditional groups with a credible digital strategy. But investors should focus on valuation – it is time to put the stockmarket rally under the microscope. This year August could bring an opportunity for disciplined fundamental investors.