On the Road to Recovery

The coronavirus pandemic has put financial markets under severe stress. Oil prices briefly turned negative for the first time, economies have shrunk at the fastest pace ever, and the number of jobs lost in many countries dwarfs previous downturns. Stock markets have plunged but then also recovered swiftly in response to the unprecedented stimulus measures from governments and central banks.

Although the outlook remains uncertain, we believe it’s vitally important to stay focused on your long-term financial objectives. As your investment manager, our challenge is to navigate the evolving environment and make sure your portfolio has the right balance of different assets to reduce risks and capture opportunities.

For example, we have an overweight allocation to US equities, which we express through our preference for the technology and healthcare sectors. The best companies in these industries should be able to continue to grow their profits because they’re exposed to enduring themes – from the ongoing digitisation of our lives to persistent demographic shifts. We also have an overweight allocation to EUR high yield and Emerging Markets hard currency sovereign bonds because we believe both asset classes offer compelling value at the current level of credit spreads.

 

THE SHAPE OF RECOVERY

We’re expecting a U-shaped economic recovery because we believe the virus will recede, policy stimulus will work and financial conditions will improve. China was the first country to come out of the lockdown and its economy has already reopened. There are also tentative signs that the situation in the US is stabilising, but Europe appears to be lagging.

We’re looking for turning points in economic activity to determine the speed of the recovery and work out what it means for the investment environment. As well as official measures such as purchasing managers’ indices, we use informal indications. For instance, restaurant bookings have recently increased in Germany, which suggests consumers are venturing back out again.

Although the pandemic has dominated everything over the past few months, we continue to monitor other issues that are influencing markets. They include trade tensions between America and China, as well as ongoing negotiations between the UK and Europe with the Brexit deadline fast approaching. The result of the US Presidential election in November is also important. Over the past few days, the Franco-German proposal to set up a European recovery fund is something we’re following with great attention, as it could provide a more effective fiscal backstop at the EU level.

 

BUILD BACK BETTER

Unsurprisingly, company earnings around the world have fallen dramatically and profit expectations remain depressed. Yet bright spots remain in some sectors, including healthcare, telecoms and technology, where some of the largest companies are consolidating their leading positions. Basic materials, energy and financial sectors have been among the worst affected.

As we look forward to better days ahead, the sense of common purpose in tackling the crisis may encourage companies to focus more on their environmental, social and governance responsibilities. For example, the COVID-19 lockdown has cut carbon emissions and some governments want to go further by harnessing their economic recovery plans to boost low-carbon industries under the slogan “Build Back Better”. Regardless of how fast the economy recovers or how we want to reflect our personal values, we believe investing in sustainable businesses makes good financial sense. Companies that use energy efficiently and look after their employees are more likely to outperform their competitors. Over the long term, they are also better prepared to meet future strategic challenges and take advantage of new business opportunities.

How long does it take to recover?

The global economy may get back to the level of output before the crisis in one year, the US in two years and the euro area in three years.
 

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