In the second half of 2020, investors should expect more uneven recoveries in equity and credit markets. Further gains will depend on the trajectory of the coronavirus and the economic recovery. Uneven performance creates potential opportunities to add value but will require careful analysis.
We believe the pandemic could exacerbate political risks in some countries and prompt a major reassessment of corporate finances and supply chains.
Fiscal and monetary stimulus appeared to stave off the worst in capital markets since the coronavirus spread across the globe. But as economies gradually reopen, we believe a sustained recovery will largely depend on controlling the virus in the second half of 2020 and beyond.
“Investors should pay close attention to whether we get a second wave of infections as economies reopen,” cautions Robert W. Sharps, group chief investment officer (CIO) and head of investments. Expectations that a vaccine can be developed and administered relatively quickly may be overly optimistic, he adds. Nor is it clear when effective drug therapies might become available. “There’s very limited visibility about that sort of relief.”
Amid uncertainty, asset returns are likely to remain uneven across countries, sectors, industries, and companies, creating potential to add value with a strategic investing approach but requiring careful analysis to identify opportunities and manage risk. “Investors will need to dig deeply to find the green shoots of recovery at the local level,” says Mark Vaselkiv, CIO, fixed income.
In this environment, valuation metrics could be particularly difficult to interpret, warns Justin Thomson, CIO, international equity. “Aggregate market valuations have never been more meaningless because of the huge bifurcation between companies that are on the right or the wrong side of change.”
“This is very different from the tech boom we lived through 20 years ago,” Thomson argues. “Today’s winners are backed by superior cash flow and cash‑rich balance sheets.”
Portfolio Manager
Mr. Thomson is the Chief Investment Officer and Lead Manager of the International Small-Cap Equity Strategy.
Head of Investments, Group Chief Investment Officer
Rob Sharps is co-head of Global Equity and Group Chief Investment Officer.
Mark Vaselkiv is a portfolio manager in the Fixed Income Division. Mr. Vaselkiv is head of the High Yield team and lead portfolio manager of the firm's High Yield Strategy.