Spotting Trends: Sector Opportunities for Q4 2021 - State ...
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Spotting Trends
Sector and Industry
Spotting Trends: Sector
Q4 2021 Opportunities for Q4 2021
• REITs historically have generated real income
and outperformed other assets in a high
inflationary environment.
• Strong demand for chips may persist in the coming
years due to the increasing penetration of 5G
smartphones, Internet of Things (IoT), and post-
pandemic digital transformation that spurs demand for
new generation data centers and cloud services.
• Biotech’s significant drawdown and underperformance
this year have created a long-term growth opportunity
at a reasonable price.
While the broad US equity market posted its sixth straight month of gains in Q3, the tug of
war between value and growth has intensified, evidenced by record high volatility of return
differences between value and growth indices.1 Meanwhile, our economists believe that although
inflation driven by supply chain disruptions and pent-up demand during the pandemic recovery
might be peaking, rising rent and housing costs may keep inflation elevated next year.2 While
the market historically has tended to be bumpier in Q4, inflationary pressure and some secular
industry trends may persist regardless of short-term market sentiment. Therefore, we see three
industry opportunities for the final quarter of 2021.
REITs: Pursue Income With interest rates near pre-pandemic lows and actual inflation as well as inflation expectations
and Total Return elevated, US REIT funds’ ability to provide dividend income exceeding inflation has attracted
investors this year. Because most leases are tied to inflation, income from leases and property
in an Inflationary
values tend to increase when overall price levels rise. This supports REITs’ dividend growth and
Environment helps investors to pursue real income during inflationary periods. In all but three of the past
20 years, REITs’ dividend increases have outpaced inflation as measured by the Consumer Price
Index.3 Although the dividend yield of the US REITs industry has declined to around 3% as some
REIT share prices increase, this income level is still much higher than inflation expectations and
yields of investment-grade bonds.4 As the REITs sector continues to recover from the economic
downturn, increases in lease payments likely will boost dividend distributions.From a total return perspective, REITs also provide investors a powerful tool for inflation
hedging. Rolling 12-month average of CPI inflation rate has increased for six straight months
in August and now sits at 3%, well above the historical median. While inflation has shown
signs of peaking recently, it’s likely to remain elevated in the coming months as the economic
recovery continues. And when 12-month average CPI inflation has been in the top two quintiles,
REITs have outperformed broad equities, US Treasury Inflation-Protected Securities (TIPS)
and high yield bonds and been on par or slightly exceeded broad commodities, as shown in
the chart below. This underscores REITs’ total return advantage over other assets in a high
inflationary environment.
Figure 1 35 12-Month Return (%)
Average 12-Month 30
REIT Relative
25
Return to Major
Asset Classes over 20
Different Inflation 15
Periods
10
vs. Commodities 5
vs. US TIPS 0
vs. High Yield -5
Corp. Bonds
vs. US Equities -10
3.0~4.5 2.3~3.0 1.8~2.3 1.5~1.8 -0.6~1.5
12-Month Avg CPI Inflation Range (%)
Source: Bloomberg Finance L.P., FactSet, between February 1, 1998 and July 31, 2021. Past performance is not a guarantee
of future results. Index returns are unmanaged and do not reflect the deduction of any fees and expenses. Index returns
reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. Commodities
= S&P GSCI Total Return Index. US TIPS = Bloomberg US Treasury Inflation-Linked Bond Index. HY Corp. = Bloomberg US
High Yield Corporate Bond Index. US Equities = S&P 500 Index.
Although REIT mutual funds and ETFs have attracted more than $12 billion on a trailing 12-month
basis, flows relative to the sector’s asset base are around the historical median of 6% and well
below the average of 11% from 2010 to 2012 when the US economy recovered from the last
recession.5 This may indicate investors are not overcrowded in terms of sector positioning.
To pursue real income and total return in a high inflationary environment, consider the
SPDR® Dow Jones® REIT ETF (RWR) for exposure to the publicly traded REIT securities in
the US.
Semiconductors: The worldwide semiconductor market is projected to grow 25% to $551 billion in 2021, following
A Beneficiary 6.8% growth in 2020, according to World Semiconductor Trade Statistics.6 Strong demand for
chips may persist in the coming years driven by increasing penetration of 5G smartphones,
of Surging 5G
Internet of Things, and a post-pandemic digital transformation that spurs demand for data
Adoption and centers and cloud services.
World Digitalization
5G smartphones have rapidly gained mobile phone market share, as shown in Figure 2. With
more mobile phone brands launching 5G-compatible models, the momentum is expected
to continue. IDC forecasts that 5G smartphones’ share of global shipments will increase to
69% in 2025.7 As one of the most critical and high-value components of 5G smartphones,
smartphone semiconductors are estimated to capture nearly two thirds of the revenue from 5G
smartphones,8 one of the largest beneficiaries from the increasing penetration of 5G handsets.
Spotting Trends: Sector Opportunities for Q4 2021 2Figure 2 80 % Market Share
5G Smart Phone 70
Global Market Share
60
Q1 2020 50
Q1 2021
40
30
20
10
0
Revenue Share Shipment Share
Source: Counterpoint Research Market Monitor, as of March 31, 2021.
The Internet of Things (IoT) presents long-term and diverse growth opportunities for
semiconductors in the 5G era — from smart home devices to industrial and automotive
applications. Integrated circuits that process and store data and execute commands are the
essential element of IoT, enabling fast and energy-efficient connections for machines and
devices. The IoT may significantly boost semiconductor revenues by stimulating demand for
microcontrollers, sensors, connectivity, and memory chips.
Another secular tailwind for the semiconductor industry is the pandemic’s acceleration of digital
transformation. The increase in remote work and migration of digital assets to the cloud are two
of the largest enterprise shifts that will most likely remain after the crisis.9 The strong demand for
data center capacity in enterprise markets has spurred capital expenditure by hyperscale data
center operators such as Amazon AWS, Microsoft, Google, and Oracle this year.10 The memory
integrated circuit makers are the key beneficiary of this rapid growth, as the segment is the
industry’s largest growth contributor.11
To position for the surging demand for next generation of semiconductors, consider the
SPDR® S&P Semiconductor ETF (XSD).
Biotech: A Secular The biotech industry had a maximum drawdown of 32% since its peak in February this year.12
Growth Opportunity Even after rebounding 12% from its August trough, the industry still lags the healthcare sector
and broader market by 23% and 25% year to date.13 Over the past 15 years, there were only two
with Attractive
periods when the industry suffered a loss greater than 30% over a six month or longer period:
Valuations 2015–2016 triggered by Hillary Clinton’s tweets about drug pricing and 2008–2009 during the
global financial crisis.14 Both times biotech recovered from the downturn to stage a strong multi-
year rally.
Historically, when the biotech industry has had more than a 10% drawdown, returns for
the following years have most often been quite positive, as shown in the histogram chart
(Figure 3). The average return for the next 12 months after a 10% drawdown was 24%, with 81% of
the time producing positive returns. Longer-term performance was even stronger, with 46% and
65% average cumulative returns for the following two and three years, respectively. Therefore,
historical statistics suggest this year’s biotech selloff might create a great entry point for
investors who are looking for long-term growth opportunities but can also stomach the sector’s
high volatility.
Spotting Trends: Sector Opportunities for Q4 2021 3Figure 3 70 No. of Months
Histogram of
60
Biotech’s Following
Year Returns After 50
More Than 10%
Drawdown 40
30
Following 1 Year
Following 2 Years 20
Following 3 Years
10
0
100
Following Year Cumulative Return Range (%)
Source: FactSet, from 03/31/2006 to 08/31/2021. Past performance is not a guarantee of future results. Index returns
are unmanaged and do not reflect the deduction of any fees and expenses. Index returns reflect all items of income, gain and
loss and the reinvestment of dividends and other income as applicable. Biotech is represented by the S&P Biotech Select
Industry Index.
Biotech’s significant drawdown and underperformance this year have led to attractive valuations
on a relative and absolute basis. The industry price-to-sales ratio is in the 67th percentile over
the past 15 years, compared to the top percentile for the health care sector and the broader
market, resulting in the most attractive relative biotech valuations in 15 years.15 These attractive
valuations may also spark merger and acquisition (M&A) activities, as major drugmakers
continue to search for new long-term growth opportunities and build their product pipeline.
This is further supported by the industry’s strong balance sheet, as the debt to capital ratio has
been low compared to historical levels.16
The SPDR® S&P Biotech Industry ETF (XBI) may help investors capture the secular growth
in advanced medicine at a reasonable price. Given its small-cap tilt as a result of its modified
equal-weighted approach, XBI also may benefit from a potential increase in M&A activities
among small-cap biotech firms.
To learn more about emerging sector investing opportunities, visit our sectors webpage.
Spotting Trends: Sector Opportunities for Q4 2021 4Endnotes 1 FactSet, as of 10/01/2021. Value and Growth are 9 How Covid-19 has Pushed Companies Over the
represented by the S&P 500 Value and S&P 500 Technology Tipping point and Transformed Business
Growth indices. Forever, McKinsey, October 2021 .
2 Weekly Economic Perspectives Quarterly Edition, 10 AWS, Microsoft, Google Lead $38B Data Center Capex
September 27, 2021. In Q1, CRN.com, June 2021.
3 Nareit, S&P Global Market Intelligence, as of 11 Worldwide Semiconductor Market Outlook,
December 2020. August 2021, World Semiconductor Trade Statistics.
4 Bloomberg Finance L.P., as of 09/24/2021. 12 Bloomberg Finance L.P., as of 09/23/2021.
5 Morningstar, as of 08/31/2021. 13 Bloomberg Finance L.P., as of 09/23/2021.
6 Worldwide Semiconductor Market Outlook, World 14 Bloomberg Finance L.P., as of 09/23/2021.
Semiconductor Trade Statistics, 08/16/2021.
15 FactSet, as of 09/16/2021.
7 IDC, as of 03/10/2021.
16 Biotech Industry Survey, CFRA, September 2021.
8 IDC forecasts $522B semiconductor market in 2021,
May 2021.
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