Because the pandemic will not cripple equity markets
Stock market analysis by Francis Ellison, Columbia Threadneedle Investments' client portfolio manager
When meeting with clients, I am often asked to formulate a prognosis for European economies: a logical request, as these same clients are often asset allocation managers in charge of making decisions based on the relative merits of the asset classes, so the macroeconomic analysis plays an important role. Such discussions are an integral part of the partnership we offer to customers – our relationship is not limited to selling products.
For me, however, questions like this pose a challenge. First, there is a lot of useful and intelligent research conducted by third parties in macroeconomics, much more so than in microeconomics and business model analysis; but we'll come back to this later. Therefore, my advice and knowledge compete with a host of other sources. Secondly, in a "normal" context my judgments may not differ much from consensus: we may be a little more optimistic or pessimistic, but the difference will not be very pronounced, nor will it be for many others who are in the same boat. Forecasts usually converge.
This is not the case at the moment. The current economic environment is characterized by such uncertainty, and there are so many changes, that macroeconomic and market forecasts have become much more heterogeneous, and some are likely to be less informed, or have not kept pace with developments. .
But does all this really significantly affect a manager who favors stock-picking? Yes, our stock selection is done through the prism of macroeconomics. However, the performance of the economic system as a whole is not particularly relevant in this case, if we take into account the fact that the economy currently operates at two speeds.
This year the economy as a whole will suffer a serious setback, and the recovery will not be symmetrical. That is, as Silvana Tenreyro, a member of the Bank of England's Monetary Policy Committee said, we will have an “interrupted” or “incomplete” V-shaped recovery. If I look at my main street in west London, however, I only see one outage and no V. Many restaurants are closing permanently; the few remaining have half the usual tables, and most are empty. Previously on leave is now redundant. Real estate agents stand by their hands. The buses and trains are empty. The social distancing in stores has pushed consumers to prefer online shopping, and the few remaining employees, equipped with masks and nervous, have little to do. In the City, where our office is located, it must be even worse: we haven't been back for six months, like the employees of the companies around us.
The parts of the economy that move at different speeds – much faster – are sectors such as technology and healthcare, and this inevitably reflects on the stock market. Given that these sectors have an important weight in the indices, there is a lot of talk about the disconnect between the stock market and the economy. In fact, to tell the truth, the problems in the main street of my neighborhood, although dramatic from a social point of view, have a negligible impact on most of the lists. A closing local restaurateur and his former staff are in no way stock market traders. Their problems are an example of the growing tendency of the poor to become increasingly poor, of the disadvantaged groups to be penalized again. We can feel anxious about them, we can – or should – feel uneasy about social and political inadequacies. But that doesn't mean we should rail against the successes of the strongest and most solid companies that our portfolios have focused on – not just this year, but for decades – as their successes are justifiable and have not caused or aggravated the problems of others. .
There are, of course, other companies that have been transformed, but which are not particularly penalized or benefited by the effects of the virus. Service companies, like ours, and those of many of our wholesale investors have moved their businesses online. For us it was an unexpected challenge, but not entirely unwelcome.
True, many of us now work at home thanks to the fundamental contribution of technology; we lack direct contact with colleagues, customers and company management, and we had to work and prepare to make the virtual equivalents equally effective.
Other sectors have seen similar developments: for lawyers, accountants and consulting firms, technology has become fundamental, while the ownership of a prestigious office in the city center and the ability to fly from one part of the world to another for business have passed, at least temporarily, in the background.
My conclusion, perhaps unexpected, is that a broadly unchanged scenario is looming, not because Covid-19 and its effects will not drastically change economies and employment for many years to come, but because the underlying trends in the stock market are in act for several years and in 2020 they simply accelerated. The brilliant results of human ingenuity in science and technology, effectively marketed in various sectors, particularly in health and technology, have given rise to solid and investable companies characterized by truly sustainable long-term growth, often with positive effects also on the environment. Our stock research and selection have been highly successful in identifying these businesses, allowing us to ask the right questions and generate returns for our clients. And this is not going to change.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-la-pandemia-non-azzoppera-i-mercati-azionari/ on Sat, 17 Oct 2020 04:58:33 +0000.