Young writers are taught the importance of the well-placed comma by considering the difference between the phrase ‘eats, shoots and leaves’ and ‘eats shoots and leaves’.
Today’s market requires a new version of the phrase: ‘eats shoots, and leaves’.
The shoots we refer to here are the first green shoots of economic recovery which in recent weeks have emerged from the debris of the Covid-19 crisis. The market has however not waited for these shoots to bloom into plants. Rather it has gobbled them up as good news. sending share prices soaring long before the recovery has really been able to take hold. Our hope now is that these same investors don’t take profits and leave.
Just under two months ago we forecasted that the major elements of the lockdown in the UK would be released around 14 June. This forecast was based on a belief that the track and trace infrastructure able to support the level of community infection trends would be in place by the middle of June. We also argued that it would be around 14 June – a week from now – that daily deaths would begin averaging less than 100 in the UK. Broadly this forecast looks to be correct. The passage of infections and deaths has followed a straight line decline for nearly two months. Progress is painfully slow but predictable. It is also worth noting that over that time we have seen gathering evidence that China has escaped a second wave of the virus on a significant scale.
Avoiding a second wave is not a given, it requires exhaustive policy action and exhausting compliance from the population. Yet we know now that it is possible.
We have also seen green shoots in the US economy. The US allowed a vast surge in unemployment in the early stage of the pandemic – but it has started adding jobs again. President Donald Trump views this as a moment for a victory lap. Most reasonable people would see this as premature given more than 21% of working age Americans – some 20 million people – are still out of work. The market’s response though has been emphatic. It believes a combination of huge central bank support and the real economy re-starting is cause for optimism.
None of this ignores the huge challenges ahead but we must remember that when the stockmarket works out the right price for a share it is seeking to understand the next ten years, not the next ten weeks. Since the end of May, riskier shares linked to the real economy – value shares – have been recovering sharply. This is a classic pattern as the path out of recession opens up and one your portfolio was well prepared for with holdings in funds exposed to this.
However, adding value shares to a portfolio is like putting salt in a meal – a little bit goes along way. Our portfolios remain highly diversified and prepared for a variety of scenarios from here. One key feature of this crisis has been that it has encouraged companies to improve their digital infrastructure. This stretches from an ability to holding a meeting on Zoom right through to examining whether or not physical offices are needed. These changes create enormous scope for disruption in stockmarkets. There are clear winners – such as cloud computing businesses – and clear losers.
We believe that finding those companies that can win in this race to reform their businesses will be one of the key trends powering your portfolio in the years ahead. The risk that this virus resurges and stockmarkets fall again does not go away. We cannot know precisely what the future holds in this environment. However, it is gratifying that your portfolio has now recouped the majority of the losses it experienced in March. Our focus now is on identifying the right blend of assets and the right investment themes to ensure your portfolio thrives as the world returns to life.
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