Investors need to distinguish businesses that are likely to perform well, as the world recovers from the virus, from those that will struggle.
WHAT YOU NEED TO KNOW
As the world economy recovers from the pandemic some things are likely to have changed forever, and we’ve identified three categories to help guide our investment decisions.
We are still interested in companies that have been affected by the health crisis but where we believe long-term growth trends remain intact.
We’re avoiding sectors that we believe were already in a decline that’s been accelerated by the lockdown, as well as those that were previously healthy but now face fresh challenges.
In the first half of 2020, global stock markets experienced a significant fall and a rapid recovery. We believed they were supported in their recovery, which appeared dislocated from the underlying economic environment. As investors, we have holdings in the technology and healthcare sectors as both continued to benefit from structural trends and we believed the investment case around them had improved. In particular, many technology companies have been significantly boosted by the COVID-19 crisis, as our economies have accelerated the transition from physical to digital. There has been a significant diversion in sector performance, with technology and growth sectors leading the market’s rise.
The COVID-19 crisis has imposed a downturn unlike any other traditional economic cycle, with its stringent restrictions causing an acute and severe fall in demand in many sectors. We believe the recovery is likely to be different to previous ones, with a number of sectors permanently or temporarily impaired. Valuations have moved to reflect the new reality with significant discounts to typical levels of profitability. There is an opportunity to selectively start to invest in high-quality companies that are structurally sound but have been impacted negatively by the crisis. It is likely that the road to recovery could take two to three years as demand recovers to pre-crisis levels.
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