Between clear progress in the pursuit of a Covid-19 vaccine and hopes a Brexit deal can still be struck, the UK’s FTSE 100 benchmark index is one session away from a record month. The index of the UK’s 100 largest companies by market capitalisation is currently up 14.2% for November.
Unless Monday proves disastrous, that will see the index record its best month since May 1990, when it gained 11.5%. And if another 0.4% can be added on Monday, a new record will be established. The FTSE 100’s best month ever was the record 14.5% improvement achieved in January of 1989.
The FTSE 250 index has also registered a great November, up 13.1% so far and on track for its best month since April 2009. And it’s far from just the London stock market that’s been flying for the past month. The MSCI World Index, covering stocks from 23 different developed markets, is up 13% for November.
But for investors who kept their powder dry and missed out on November’s strong gains, there are still likely to be plenty of opportunities out there. Especially in the UK, which has also had Brexit uncertainty to contend with over the past few years, even before Covid-19 came around. The FTSE 100 is still 15.5% down on where it was in February before the pandemic-induced sell-off, and the FTSE 250 11% off its high point for the year, set the same month.
The MSCI World index is, unlike the London Stock Exchange’s major indices, actually up for the year. It’s almost 14% ahead of its closing level at the end of 2019. The same can be said of the major indices in the USA. The S&P 500 is up over 12.5% for the year and the broad Dow Jones around 5% to the good. The tech-focused Nasdaq is up an almost incredible 36%.
2020’s stock market gains driven by tech
It’s that last figure that offers hope to investors who have not yet benefited from the surprisingly robust stock market rally from the depths of March. The impact of the Covid-19 pandemic has not treated all sectors equally. Far from it. The tech sector has benefitted hugely from how markets see the acceleration of the global economy’s digitalisation.
Many technology companies, especially those in ecommerce of online entertainment, for example Amazon, have benefitted immensely from lockdown restrictions keeping people at home. Many of the slower adopters of online products and services have been forced over the line and are now accustomed to participating more regularly in the digital economy. For example, older demographics who had avoided online shopping until 2020.
Amazon’s share price has gained a whopping 72% over 2020. The UK’s Ocado, which has a retail online groceries delivery business in partnership with M&S, as well as a now bigger technology business selling its warehouse automation systems into international supermarket chains, is up 73% for the year.
But Ocado is one of the London Stock Exchange’s few technology stocks of note. Which goes a long way towards explaining why our domestic indices are lagging the stronger recoveries, and even gains, seen elsewhere.
Has over-optimism on technology stocks been matched by other sectors being over-sold?
As positive as the pandemic has been for the technology, especially online, sector, there has to be a strong suspicion the huge boost to the valuations of companies in the space has been overdone. Tech valuations were already considered stretched in early 2020.
They could now be described, in some cases, as detached from fundamentals entirely. At least in the context of traditional multiples. Amazon now trades at a P/E ratio of 93.58. Rival Walmart, the traditional bricks and mortar retail giant that is also investing heavily in expanding its online presence, has a P/E ratio of just 21.89. Walmart’s revenues are still over 70% higher than Amazon’s and it has a big opportunity to grow its ecommerce market share.
It wouldn’t be a big surprise if the technology sector gives up some of its 2020 gains next year, when Covid-19 vaccines should return the economy to something like a normal footing from spring on. The digitalisation of the economy will continue, and hold on to some of the accelerated gains of 2020. But it also seems inevitable that, once life returns to normality, we’ll also go back to many of our previous habits. And spend less time, and money, online.
There is a strong argument that the technology sector has been over-bought this year. Markets may or may not choose to rectify that as 2021 progresses. Many other sectors have been heavily punished by both lockdown restrictions and markets. Travel & tourism, aerospace, hospitality, ‘live’ entertainment or group events involving large numbers of people in a restricted space and more traditional retailers.
Most companies in these sectors are still heavily down on their valuations of early in the year. With revenues devasted by lockdowns and lingering concerns during the window between the first and second waves of the pandemic, there is also an argument valuations of companies in these sectors have been fairly downgraded. But within the context of how markets have treated sectors to benefit, perhaps they have also been over-sold.
It’s very unlikely that these sectors and companies will face another year as bad as the one they are currently weathering. Though most will have to service considerable debt taken on to get through 2020. But if markets treat many of these companies in the same way they have peers in other sectors this year, when revenues return to something approaching normal levels next year, their share prices would be expected to take off.
UK stocks with the potential to double in value in 2021
The shares that are still showing the heaviest losses for 2020 should, in theory, be those with the most upside when things start to improve for them post-pandemic. Investors that have missed out on gains this year, or those hunting for their 2021 strategy, should keep a close eye on these beaten up LSE listings.
The UK’s largest cinema chain, and one of the world’s largest, the Cineworld share price has taken a hammering this year and is down over 70%.
It is hoped that a glut of anticipated big budget cinema releases postponed during 2020 will hit the screens for summer 2021 and the general public will be more enthusiastic than ever to watch them on the big screen after a year of deprivation. Many analysts are predicting that Cineworld stages a strong recovery from spring onwards.
Easyjet & the travel & tourism sector
Budget airline Easyjet is down over 40% for 2020 but short haul air travel should be back in force from spring onwards. After a year during which many haven’t travelled at all, often cancelling trips, or seeing them cancelled by restrictions, there is also an expectation that we’ll be keen to make up for that once a vaccine is rolled out.
Easyjet and other budget airlines can expect to see passenger numbers bounce back and share prices with them. Holidays booking sites and companies whose business is tightly bound to travel and tourism, for example WH Smith which has newsagents and bookstores in airports, should also benefit.
Premier Inn owner Whitbread is down around 25% and should be well positioned to bounce back next year, and take advantage of the struggles of independent hotels and smaller chains who haven’t been able to shore up balance sheets this year in the same way.
There are plenty of other UK and international stocks that have suffered in 2020. It could be a good moment for investors to consider banking some of their profits from the tech sector this year, if they have caught that trend. For those looking to twist again, or who missed out, look for value in the sectors that still show the worst bruising.