Suzanne Hutchins, portfolio manager at Newton Investment Management, argues that the volatility sparked off by Covid-19 could be here to stay.
The second half of the year will bring new waves of volatility, as markets and economies continue to be closely influenced by the news flow around Covid-19 for the foreseeable future, and state intervention will continue to play a vital role in supporting economies around the world.
However, the array of fiscal and monetary stimulus deployed by governments and central banks globally has undoubtedly helped to underpin risk assets. Investors have also started to look forward to some economic normalisation as we begin to exit lockdown measures, with the data from a number of the Asian and Australasian countries providing grounds for confidence that this can be achieved without a corresponding increase in infection levels.
Safe assets will also continue to make headlines as all investors reach for assets such as the US dollar in times of economic stress. However, investors in currencies should be cautious as the world’s major currencies are currently each vying to be the weakest currency to boost their global competitiveness. For this reason our preference is to invest in gold, because it has the appeal of a real asset that cannot be manipulated or debased.
Under times of stress government intervention becomes fundamental to economies and if what we have seen in the first half of this year is anything to go by, it would be reasonable to expect to see further large-scale monetary and fiscal policies from governments around the world.
The simultaneous commitment of central banks to purchase government debt, alongside action from governments in directing fiscal spending to support household and corporate incomes have been necessary, given the circumstances. The danger is that this then creates inflationary pressure. Beyond the near-term impacts, if new monetary policies create a path to inflation, then investors could face a very different outlook to that which they have experienced over the last three decades.
Despite most of the world having gone into lockdown and now re-emerging, the broad momentum of global politics has remained on track. For the world’s largest economy, this has meant US election campaigns are in full swing and for the UK, Brexit negotiations are ongoing, despite being given little airtime. Investors should continue to consider US politics as US markets could be impacted by the shift in polls for the US election. Historically, US elections have exaggerated and extended price volatility, and we expect this election year to be no different. In the UK, Brexit may cause the economy to stutter further at a time when the economy is fragile.
Where to look in the second half of 2020
We expect Covid-19 will continue to impact markets as we head into the second half of the year. For this reason, in the near to long term investors should focus on those sectors that are less susceptible to lockdown measures and the economic cycle. One group of companies that has had a remarkably ‘good crisis’ are the leading US technology companies the ‘FAANGs’ which were worth twice as much as the entire FTSE 100 as at the end of May 2020! These companies are typically cash rich, so face no balance-sheet problems, and the nature of their business has actually seen them gain market share from more traditional business models. As such, they have not only weathered the storm relatively well, but also been in the vanguard of the subsequent rally.
It is likely we will continue to see increased resources deployed to pharmaceuticals to cure illnesses such as Covid-19, but investors should focus on quality companies spearheading innovation as this will be a key differentiator. Investors more focused on the consumer sector may consider investing in established brands.
Whilst the share prices of the more cyclical areas of the economy such as airlines, hotels and restaurants have been more depressed because of the direct impact of the lockdown, there is likely to be some ‘catch up’ as the market rotates into these out of favour names as the economy recovers. We would tread carefully and invest in only those that will be survivors of the post Covid crisis world and only those that exhibit strong fundamentals and financial strength.
Following the year that put rainbows on windows across the UK, green is the colour we hope to get behind in 2021. The economic and social lockdowns caused by Covid-19 have led some investors to reflect on the need for a more sustainable future.
The massive stimulus packages announced by governments, including a likely significant increase in infrastructure spending will represent a tailwind for this area of the market, particularly green projects which are likely to lead to further growth in the green bond market as funding is provided.
The credit excesses across the world, most notably in China, give us cause for concern, particularly as the growth in leverage has been substantial and has extended into areas such as shadow banking which are by their nature opaque and less tightly regulated. This said, emerging markets will ultimately be great beneficiaries over the longer term especially if the US Dollar continues its path of weakness. This should be supportive of liquidity conditions where the world’s wealth is growing fastest, where you have the massive populations and with a 10 year view, certainly a region where investors are likely to be well rewarded.
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