No one can be sure about the duration and economic impact of the covid-19 pandemic, nor can anyone predict the eventual consequences of unprecedented worldwide government stimulus packages.
Moody’s Investors Service expects G-20 advanced economies, as a group, to contract by 5.8% in 2020. Yet, the S&P 500 index gained 12.8% in April, the biggest increase since January 1987, and the MSCI World index rose 10.98%, according to FE Fundinfo.
Optimism, or perhaps the “fear of missing out”, as governments and central banks injected trillions of dollars into markets and economies, lifted stock prices from their lows of 23 March.
In this environment, investment professionals are cautious about making strident market calls. However, they can advise on short-term portfolio tactics, and look beyond the present turmoil to recommend strategic allocations.
Patrick Ho, chief market strategist for north Asia at HSBC Private Banking thinks that “the spike in valuations after the recent rally has been too sharp”, and so he is focused on “quality stocks, resilient dividend payers and structural themes such as healthcare and technology”.
In the US, HSBC PB prefers defensive sectors, such as consumer staples, healthcare and utilities, because “uncertainties remain”. In emerging markets, the firm is sticking to China and other countries with “deep pockets for fiscal support and monetary stimulus”.
Jason Liu, head of the chief investment office for emerging markets at Deutsche Bank Wealth Management, also likes consumer staples which are profiting from the covid-19 induced surge in demand for household and personal care products.
“Roughly two-thirds of consumer spending in the US and Europe is on ‘auto-pilot’, driven by essential goods and services, which positively affects top-line growth for the sector,” he said.
However, Adrian Zuercher, head of asset allocation in APAC for UBS Global Wealth Management’s chief investment office, is more cautious, following the April rally in equity markets.
“As stock valuations seem broadly in line with our central economic projections, we identify a limited number of opportunities in equity markets,” he said.
These include stocks that have suffered excessive price declines despite still-solid fundamentals, quality companies with strong balance sheets that should be resilient, and “cheap stocks” in Asia which are likely to see a limited impact on earnings despite the global shutdown of most economic activity.
Meanwhile, confidence in the structural themes promoted by investment advisers in recent years seems undiminished.
“The pandemic will accelerate some longer-term trends, including wider adoption of technologies such as video conferencing, virtual learning, telemedicine and e-commerce,” according to Zuercher.
Ken Peng, Asia-Pacific investment strategist at Citi Private Bank, unfashionably, believes “‘deep cyclical’ sectors such as energy, industrials and materials could do well”, as post-pandemic economies recover and rebuild.
But he also remains committed to sectors that have “decent long-term growth prospects and have cheaper valuations”.
Peng highlights consumer discretionary, gaming and autos, as they expand to meet demand from wealthier populations in China and Southeast Asia.
Hou Wey Fook, chief investment officer at DBS Bank, also thinks China “is the place to be invested in now and for the longer term”.
Time of transformation
A new generation of homegrown companies have become some of the world’s fastest growing and most innovative, and are supported by a rich ecosystem of state and private funding, government-driven regulatory enhancements, and a huge domestic consumption market, according to Hou.
He also has his sights on transformative trends worldwide. These include shifts in demographics, a transition in millennial lifestyles, and the internet of things.
Indeed, companies that have strategies to adapt to these secular trends should be long-term winners, despite the damage caused by the covid-19 pandemic.
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