It is clear by now that Europe is facing a second wave of Covid-19, with countries like Spain and France particularly impacted. Hopes of a vaccine being approved in the next weeks seem overrated – unless the US Food and Drug Administration were to compromise on safety issues. The good news is that the mortality rate is receding, be it because of generally more careful personal behaviour, improved testing/tracing systems, a better medical understanding of the disease and its treatment, or the fact that the most fragile patients were infected during the first wave. Still, economies across the globe will have to face continued social distancing measures, as well as localised and temporary lockdowns.
A number of “zombie” businesses are being kept alive by government furlough schemes, themselves enabled by the cheap money provided by central banks. At some point in the future, though, reality will hit companies whose business model is threatened in a lasting way by the virus. Business travel and office real estate are particularly at risk in our view, with teleconferencing and working from home having proved their worth – in both financial and qualitative terms – during the pandemic. Whether consumers will revert to their prior travel habits beyond the virus is an open question, but the changes in behaviour in the corporate space certainly seem durable. Investors should pay attention not to jump on those battered sectors in an indiscriminate way and a careful selection will be warranted.
Alongside the spreading of the second wave of Covid, and in fact intermingling with it, are two other major concerns: the US elections and Brexit. As regards the former, polls and betting odds lean slightly in favour of Joe Biden at this point, although much can still happen in the space of one month. Indeed, uncertainty may well continue to prevail even after election day, with President Trump unlikely to concede defeat easily. And then there is the replacement of Justice Ruth Bader Ginsburg at the Supreme Court. Whether or not the current president manages to have his conservative nominee appointed before 3 November will have long-term implications for the US – and perhaps a short-term one too, should it come to the Supreme Court to declare the winner of the 2020 White House race. With respect to Brexit, 15 October is Prime Minister Johnson’s self-declared deadline for a deal with the EU. Frankly speaking, the situation of his country appears to us as being on the verge of chaos, yet it is hardly making the media headlines.
All told, financial markets are likely in for a shaky period. Beyond that, however, with interest rates set to remain durably low, the path of least resistance for equity indices continues to be up. As such, we would look to buy the October (or November) dips. And we would do so in a diversified way. Remember that this is first and foremost a liquidity-fuelled upmove.
China: The Merits of a Long-Term Focus
Source : Bloomberg
The last days of October will also see an important event in China: the 5th Plenum of the Chinese Communist Party. The objective of this meeting is to map out the country’s 14th five-year plan, covering the 2021-2025 period, as well as an even longer-term strategy, dubbed “Vision 2035”.
In relative terms, the Chinese economy is looking rather resilient right now. Despite having been hit first, and hard, by the coronavirus, it should manage to deliver positive GDP growth for the full year, powered by the industrial sector. But China’s real economic advantage lies in its policymakers’ inclination – and ability – to think long-term.
It is for this reason, notably, that we have long felt that, contrary to what many in America believe, China holds the upper hand in the trade conflict. For several years now, Chinese authorities have been working hard to move their country up the value chain – transforming it from a manufacturer of low-cost goods to a technological leader. Early 2019, we wrote in this same investment letter that we expect a technological divide to form over time between the East and the West, with separate developments and leading companies on either side of the “wall”. In a similar fashion, we would now point out that China is well on the way of achieving commodity independence. Thanks to its multi-year “Belt & Road” initiative, into which it has already poured huge sums of money, as well as to its numerous direct investments in Africa.
It follows, in our view, that investment portfolios should have structural exposure to Chinese equities. The market is admittedly up very strongly year-to-date, reflecting the country’s faster-than-average bounce back from the Covid-19 crisis. But valuation remains well below that of US equities – even if one excludes the “darling” technology stocks. So here again, our word of conclusion would be: “buy the dips”.