The broad markets advanced unusually strongly after the sell-off in March, but not all asset classes followed. The U.S. asset manager T. Rowe Price points out where investment opportunities in stocks and bonds are available even at the current level.

In view of the spreading of the coronavirus, the equity markets proved to be extremely robust. While the S&P 500 Index lost value more quickly than ever before from its all-time high on February 19 to its low in March, the recovery was also unprecedentedly fast.

The U.S. stock market barometer already reached a new record high on 22 August. Despite this strong rise, there are still some interesting investment opportunities. Opportunities are offered by banks and materials stocks, which usually perform well very early in an equity cycle.

In the financial sector, for example, valuations have fallen massively as investors are concerned about the risks posed to banks by non-performing loans. Lower interest rates have reduced credit margins and continued to weigh on the sector. Some companies have cost-cutting potential. The emerging markets with their young and fast-growing populations also appear to offer great opportunities. India and Vietnam, for example, are characterized by structural growth and low debt.

Growth and Value Stocks Before a Direction Change

The valuation gap between growth and value has reached its highest level since the early 2000s in the wake of the significant rise in the share prices of Internet giants and the profiteers of the «stay-at-home» economy. This gap could become smaller in the future. Both categories offer opportunities, although the gradual recovery of the economy is likely to ultimately favor values stocks. History suggests that the turnaround could be dramatic when it happens.

Investors should look in particular at industrial companies with solid long-term growth prospects, which are currently facing cyclical problems but have good cashflows. In addition, the ongoing trade dispute between the U.S. and China opens up many new opportunities for companies based in other countries. European companies, for example, are likely to take large market shares from the Chinese giant Huawei for 5G telecommunications equipment.

Cheap Bonds From Automotive Suppliers

On the bond markets, spreads of high-yield bonds over U.S. government bonds should remain stable in the coming months, provided that the global economy continues to recover. Investors should then be able to continue to generate attractive current income. Opportunities are offered by issuers whose bonds have been sold off massively due to the market turbulence, but who have sufficient potential cash flows to weather the storm.

Although the pandemic has also affected the global automotive market, some automotive suppliers are favorably valued and on the road to recovery. Nevertheless, many less resilient companies will not survive. It is expected that this year around 9 percent of US high yield issuers and 5 percent of their European counterparts will become insolvent.1

1 Source: Internal Research of T. Rowe Price

Robert W. Sharps is Head of Investments and Group Chief Investment Officer at T. Rowe Price and has been with the Baltimore-based U.S. asset manager for 22 years. He holds a Master of Business Administration in Finance from the University of Pennsylvania and a Bachelor of Science in Accounting from Towson University.

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