What I’d do as the stock market rally gets into full swing

The stock market rally is well underway again, as evident from April numbers for the FTSE 100 index. But what are the best stock to buy now?

Manika Premsingh ❯

@macro_think

Manika Premsingh is an economist, financial writer and investor, with a focus on converting macro trends into actionable investment ideas. She has worked in the UK and India with clients across financial services, consulting firms, public sector and non-profits. She has shared her views at multiple international forums and has been widely quoted for them in leading media. Manika is a Masters in Economics and was also a recipient of the Goldman Sachs 10,000 Women scholarship for Certification in Entrepreneurship for her research startup, Orbis Economics. She is on twitter @macro_think

Published 14 April, 2021 5:22 pm BST

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Midway through April, the FTSE 100 index is up 2.3% on average from last month. This is after it already rose 2% in March. I think it is now becoming clear that the stock market rally has resumed.

Signs of the stock market rally

It was less so in February, when it fell by 1.7%, but in hindsight that appears to be more of a blip than anything else. The FTSE 100 index has made sequential gains every month, save February.

On average, it is up 17% now compared to its October levels. Compared to last April, the index is doing even better. It is up almost 20%.

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My point is, I think we can safely say that the stock market rally has not just resumed (now we know that it had already done so in March) but is in full swing.

So, what should I buy now?

The valuation measure dilemma

This is a bit of a dilemma for me.

Because we are in more sharply defined economic times than usual, at present I am most comfortable looking at FTSE 100 stocks as either defensives or cyclicals. In other words, they are either safe in a stock market crash or likely to go boom and bust with the business cycle.

Defensives ran up a fair bit in the months following the lockdowns and the stock market crash. On the other hand, cyclicals had it bad during those months. But come November 2020 and the stock market rally and their share prices have risen sharply too.

While defensives’ prices have come off, the decline is not really substantial. This is evident from their market valuation measures. My quick and easy, go-to method for comparing them to peers is to look at price-to-earnings (P/E) ratios.

But because many companies have been shut down, we cannot consider earnings now. So I look at price-to-sales (P/S) now. So, if Wizz Air’s P/S, as an example, is far higher than that of easyJet‘s, it is valued relatively more by investors than easyJet.

But coming back to the main point, while comparative valuations for defensives have remained relatively elevated, those for cyclicals have risen sharply too. Lloyds Bank, for instance, has an over 35 times earnings ratio at present.

Finding FTSE 100 bargains

As a result, it is increasingly harder for a bargain hunter like me to find reasonably priced stocks. There are a few, however, even among the FTSE 100 stocks that are financially sound, have good prospects and have a sub-15 times P/E.

One is the multi-commodity miner Rio Tinto, which is having a good run because of the commodity price bull run. It has run into serious trouble for other reasons though, in the recent past.

Another one is Polymetal International. Even though gold prices have been muted since the outlook for the economy turned positive late last year, the company posted strong financials even before gold rallied.

I also like warehousing real estate investment trust (REIT) Segro, even though its recent share price trends have been uneven. It is one for the long term, however.