Strategic Insights | The clocks go back, but we look forward
A different flavour of winter
The nights may be getting darker as the clocks go back, but we at Investment Quorum are looking forward. As we enter the final few months of 2020, we don’t just have the usual winter flu season to contend with: this year we can add a second wave of Covid-19 into the mix, most likely resulting in some more than moderately volatile market conditions. But disruption, the implementation of thematic strategies and most importantly sustainability are all creating some excellent investment opportunities in our ever-changing world. Indeed, sustainability will most likely be a significant factor affecting investment strategies and decisions for decades to come. So, what comes next? Nobody really knows. But we believe that our lives are about to be governed by a series of “V” words, and this might provide us with a possible investment roadmap.
Don’t knock volatility
Firstly, there is “V” for volatility. This will continue throughout 2021 as the global economy begins its uphill struggle to recovery. Factors such as the US presidential election, Brexit and a second (or even third) wave of Covid will catapult the financial markets off on a veritable rollercoaster ride. But this will create interesting opportunities for investors able to take advantage of them.
In the short term, there are certainly reasons to be positive. We are in the midst of the corporate earnings season, which is certain to prove fruitful. Indeed, Tesla shares jumped 5% after reporting their fifth consecutive quarter of profits. Moreover, consumer staples shares have reported strong Q4 numbers. Proctor & Gamble beat estimates on Tuesday, reporting a 9% jump in sales, confirming that a “technology and toothpaste” strategy is still a sensible one to follow.
With Christmas just around the corner, there is also the prospect of a “Santa Claus Rally”. This is usually characterised by general feelings of optimism on Wall Street against a backdrop of holiday bonuses being invested – something which has boosted the stock market in the past. According to the Stock Trader’s Almanac, since 1974 the Santa Claus Rally has yielded positive returns in 34 of the past 45 holiday seasons – the last five trading days of the year, followed by the first two trading days after New Year’s. Nevertheless, we live in a world devoid of guarantees and this may simply be a market anomaly.
One day, my vaccine will come
Secondly, there is “V” for a vaccine. If a successful one were announced, the market would most likely be inundated by a plethora of buyers (people who have been sitting on the sidelines throughout this crisis, too scared to invest). We have recently seen one of the fastest stock market rallies in history, but many nervous investors missed out. Covid-19 vaccine trials have been progressing well, with a number of leading pharmaceutical companies having already announced some promising results.
While the eyes of the markets remain on Congress as stimulus negotiations for a second round of checks continue, there is every chance that it could be somebody like Pascal Soriot (CEO of AstraZeneca) or Stephane Bancel (CEO of Moderna) who will deliver the biggest market stimulus in the shape of a vaccine. Although a successful global vaccine is unlikely to be available until 2021, when one does come, it will be a game changer. Indeed, hopes in relation to vaccine development represent one of the many “icebergs” around which investors will be navigating in the coming months. We cannot see what is under water, nor what is on the other side. But we remain steadfast in our commitment to picking the most innovative and forward-looking businesses… those that are spearheading the themes characterising our changing world.
Value at last?
Thirdly, “V” for “Value”. Value could finally have its day, following a number of years during which growth stocks have been very generous. That is not to say that growth will now fail. On the contrary – it is simply that valuations are now looking more attractive for many value stocks. Wall Street has delivered some excellent returns this year, although admittedly these have been generated through a narrow technology-focused market.
Whether it is automation in industrial production, blockchain technology enhancing the supply chains of materials companies or fintech facilitating improved service for financials, we select managers who share our belief that the future will be shaped by these digital themes. Therefore, a widening out of the market to capture sectors such as industrials, basic materials and the financials will be essential over the longer term. Any change in monetary policy or a pick-up in inflation would be a positive for value stocks.
As far as the global economic recovery is concerned, a few green shoots are already starting to appear in China, where Covid has already been declared under control. And in 2021, the Chinese economy is likely to enjoy its fastest expansion in eight years. For world regions currently suffering their second Covid wave, the economic backdrop remains uncertain. But we will continue to focus on high-quality businesses which maintain strong balance sheets, while adopting a forward-looking approach to the future. We select managers who think along the same lines, so are confident that our approach is robust and should be able to withstand further volatility in the months ahead.
“V” is also for victory
Fourthly, “V” for “Victory”. A vaccine would evidently be a huge boost for investment sentiment and would eventually herald the start of the global recovery. Remote working, online shopping and the Internet of Things (IoT) have all derived enormous benefit from the pandemic. The high street, travel and leisure, on the other hand, have all been decimated as consumers have shied away from their normal activities and routines. As the end of the year approaches, countries around the world will be focusing their efforts on the best ways to deal with a second or even a third wave of Covid-19.
One positive is that the healthcare, biotechnology and technology sectors have all benefitted from the digital revolution and the transformation of industries. This should not only help treat patients suffering from the virus (the FDA this week approved Gilead Science’s remdesivir as a treatment for Covid-19): it should also result in improved patient care across the world once we have declared victory against the virus.
Such progress in healthcare demonstrates the remarkable things that can be achieved through human ingenuity, as well as highlighting the importance of focusing on a world beyond Covid-19.
As winter sets in and the clocks go back, Investment Quorum remains forward-thinking and optimistic about favourable investment opportunities ahead.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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