Further Growth Potential for Undervalued Stocks

  


Key Talking Points:

  • Global stocks push higher on Moderna Monday
  • Rotation into cyclical and oversold stocks continues
  • Italy offers great growth potential but coronavirus cases continue to surge

In a “dèjá vu” of last week, we rise this morning with an equity market that is feeling slightly hungover after two of the three main US indices reached an all-time high last night. Although not necessarily needed, given the direction the market was heading in, another round of positive vaccine news was the catalyst for yesterday’s gains, despite the reaction in the market being slightly subdued compared to seven days prior.

Moderna Monday, as it is being called, lacked the surprise factor that Pfizer Monday had, and in a truly capitalist world, rewards are given to those who accomplish innovation, with residual rewards for those who come after. Diving deeper, we can see in increase in interest for cheap and highly leveraged stocks, which is the opposite to the trend seen in most of 2020, suggesting that there is a rotation of capital from growth to value stocks. Up until now, most of the year has consisted in looking for a safe-ish return, favouring those stocks with strong financial ratios and sales data, leaving sectoral and cyclical stocks highly undervalued, that is if we stick to a forward-looking theme.

BIGGEST WINNERS OF VACCINE NEWS ARE THE HARDEST HIT FROM PANDEMIC

FTSE MIB Forecast: Further Growth Potential for Undervalued Stocks

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This allows for some of the hardest-hit European indices to catch up to their US counterparts, most notably those who have had the hardest blow from the coronavirus outbreak, which include Spanish, French and Italian stocks. The FTSE MIB has done a great deal already to catch up in the last two weeks, even managing to close the coronavirus gap, a big deal given its previous failed attempt back in July.

FTSE MIB Daily chart (07 March 201917 November 2020)

FTSE MIB Forecast: Further Growth Potential for Undervalued Stocks

But, aside from the IBEX 35, the FTSE MIB is lagging other European indices in their attempt to recover the losses seen since March, If we compare Fibonacci levels, the CAC 40 is attempting to push above the 76.4% retracement, while the DAX 30 has been attempting to push towards the 100% line for the past three months. Similar to the FTSE 100, the FTSE MIB is only now securing the 61.8% retracement level, suggesting that there is greater upside potential if focusing solely on risk-on sentiment given positive vaccine news.

If we see a persistent rotation towards cyclical value stocks there are a few technical levels to look out for. The psychological 22000 mark is a good place to start if we’re looking for areas of increased selling pressure, given that setbacks and corrections are inevitable when consolidating a long-term trend. Further on, the 22350 area could offer increased resistance, given it was the area that stopped an attempted recovery of the immediate aftermath of the initial coronavirus outbreak, and also a significant level back in mid-2019.

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From a wider macro perspective, three external factors have now lined up to offer what could possibly be the next bull run. On one hand we have the outcome of the presidential election in the US, followed by a possible solution to the coronavirus pandemic and lastly increased talks of a possible Brexit deal to come. All these seem to be clearing up uncertainty in the market, which has been the main factor holding up further gains in equities, leading to the possibility of sustained market rallies.

But lets not forget that the threat of continued spread of coronavirus is still very real given that, even in the best case scenario, a meaningful rollout of the vaccine is unlikely to take place before mid-2021, meaning that economies are still braced for one of the hardest winters. And Italy is again one of the top European countries suffering from the second wave of the pandemic, with more than 40,000 daily cases and hospitals on the verge of saturation, with local doctors calling for a nationwide lockdown to avoid a collapse of the healthcare system.

EVOLUTION OF THE PANDEMIC IN ITALY

FTSE MIB Forecast: Further Growth Potential for Undervalued Stocks

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin





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