Grim news about a resurgent pandemic on one hand, exuberant stock markets on the other. That was the paradox confronting the members of our annual investor roundtable when we gathered to talk about 2021. Fresh hopes about the arrival of a COVID vaccine, of course, were the updraft lifting those soaring stocks. Our panelists shared the optimism, though they had sharply contrasting ideas about how to play a post-coronavirus recovery. (Bet on beaten-up blue chips, or stick with young disrupters? Old-school banks, or fintech?) They shared the concern that stocks could lose their luster quickly if a return to economic normal led to rising interest rates. And they agreed on one other interesting point: Diversity in management and enlightened treatment of employees were good things for shareholders too.
This year’s panel included Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management and author of How I Invest My Money; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, founder and general partner of early stage venture capital firm Operator Collective. What follows are edited excerpts from our discussion.
Fortune: Investors are absorbing two big pieces of potential good news—U.S. election results that look positive for business, and major progress on COVID vaccines. How might those factors play out in 2021? Should investors be looking at beaten-up “value” sectors like banks and industrials?
David Eiswert: I don’t think it’s quite as simple as value and growth, because the virus has caused this situation of extremes. You can buy growth companies today that have extremely negative business fundamentals. Mastercard is going to be a great stock in the next couple years. But Mastercard lost all its cross-border business to COVID, so the stock has struggled at times this year.
Speaking of borders, U.S. markets performed far better than most foreign markets through the pandemic. Are there international stocks that investors should pivot to?
Josh Brown: What I think will be different 10 years from now is that we’ll stop talking about stocks based on what country they’re in. Investors are going to harness new technology to build globally diversified portfolios, weighted toward sectors where there are strong reasons to be invested.
Same with growth and value. I’ve watched energy go from 18% of the S&P in the mid-aughts to under 1% now. I’m sure it can mean-revert and go back to being 3% or 4%. But it’s not going back to 18%. Our grandkids are not going to be in vehicles powered by dinosaur bones. Value right now is basically energy stocks and banks. And banks are another area where there is no secular growth anymore: Once PayPal got into the room, and Rocket Mortgage and Lemonade and Root and all of these new disrupters? So we are trying to reorient investors’ minds around the concept: It’s not U.S. versus rest of world or value versus growth, it’s stocks that can go up long term versus stocks that only go up in fits and starts.
Savita Subramanian: The idea that we’ll see sectors rather than regions is interesting, but I don’t know if now is the time. For multinationals, what’s happening is they’re forming little ecosystems. And there are big divides between countries today from a values and governance framework. The U.S. and Europe may have a more similar value structure, whereas China’s framework, political backdrop, and governance structure is very dissimilar. Another issue that we need to think about is just the role of China in U.S. companies’ manufacturing.
Eiswert: One of the things that helped U.S. markets get through COVID is that the United States has a global reserve currency and a printing press. So you’ve got great opportunities, still, to buy franchise companies in emerging markets, where the currency got destroyed. There’s a great story of growth in Indian banks. You could have bought HDFC Bank a few months ago for one-and-a-half times book value, which is an amazing valuation for a company that grows its earnings 10% a year.
315%
Price premium of growth stocks over value stocks in the MSCI World Index at the end of the third quarter—a gap that suggests value stocks are due to rebound.
There was a major acceleration of technological adoption in so many industries during the pandemic. Will that momentum continue?
Mallun Yen: The digitization of work was always inevitable. What we’ve seen with the pandemic is that what might have taken decades to roll out, it’s forced widespread adoption immediately.
We’re also seeing a new generation of founders who came from, for instance, the Googles and the LinkedIns and the Twitters and the Salesforces of the world, who then go on to these companies that were trying to disrupt those old-school industries—and who now are going beyond that with their own startups. Let me give you an example, which is a company in insurance tech called AgentSync. They do something very boring, which is licensing of insurance agents. But the founders came from LinkedIn, and then went on to Zenefits, in the case of the CEO, and the CTO went to Dropbox and Stripe. They saw a problem with respect to licensing compliance when they were at Zenefits, which is what AgentSync is focused on. And while they are not people who’ve been in insurance all of their lives—they bring with them the LinkedIn experience, as well as Dropbox and Stripe—all that experience from enterprise tech. And so that’s going to enable them to accelerate some of the changes faster than you would see otherwise.
Sarah Ketterer: Before banks get too maligned: From a value perspective, they became so cheap. Valuations of European banks fell through October lower than they were in the global financial crisis, even though they have much more capital now. And if a really good bank has big franchises in faster-growing countries in Central and Eastern Europe, like UniCredit in Italy does, it’s worth looking at. UniCredit trades at 40% of tangible book value, less goodwill, and it should trade at 80%. That, in my simple math, is a double, and I’ll take that any day.
We’ve been talking about the pandemic as a win for tech. But not all technology is COVID-proof. If you’re running, say, an online travel business, your stock is struggling.
Eiswert: We’re shareholders in Trainline. They basically run the app for electronic ticketing for the U.K. and continental Europe. They’ve had a disaster of a year. But they’re only gaining share. And as train ticketing comes back, there’s not going to be any paper tickets. It’s a long-term growth story—they just happen to be on the wrong side of COVID.
Subramanian: The interest rate backdrop is so low right now that it seems like you need to be in really long-duration growth stocks, especially in tech. Those stocks have looked amazingly attractive because the cost of capital has fallen to very low levels. But if you use an interest-rate-sensitive valuation model, growth stocks now look more expensive than value companies.
Eiswert: There’s also a big difference within tech. Apple and Microsoft trade at very high valuations. Amazon, I think, is experiencing extremely positive fundamentals which are not sustainable. And on the other hand, I actually think Google has been hurt by COVID. So Google’s valuation looks attractive. Facebook actually looks attractive.
Ketterer: The stocks in the absolute epicenter of pain of the big wipeout, so many of them are in travel, hospitality, aerospace, and aviation. But wow, what you can find there. Who would have imagined that you could buy Airbus at 12 times earnings—a company in a duopoly. Or in travel, Sabre or Amadeus, its Spanish-listed competitor. They’re all about travel volume, and when it picks up, that’s when they generate fees.
More from the Investor Roundtable
IPOs, SPACs, and direct listings: Silicon Valley opens the doors to more investors
Why investors like socially responsible companies
The biggest risks and opportunities for investors in 2021
Mastercard (MA)
PayPal (PYPL)
Rocket Companies (RKT)
Lemonade (LMND)
Root (ROOT)
HDFC Bank (HDB)
UniCredit (MI: UCG)
Trainline (LON: TRN)
Alphabet (GOOGL)
Facebook (FB)
Airbus (PA: AIR)
Sabre (SABR)
Amadeus (MC: AMS)
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”
