Cloudy with a Chance of a Bear Market
David Souccar talks about finding the right portfolio balance, and opportunities in luxury goods, entertainment, convenience stores and pharmaceuticals.
Global equity markets rallied in the second quarter almost as quickly as they declined amid the shock of the pandemic. Share prices have responded to massive global monetary and fiscal stimulus and seem to be ignoring the risk of a second COVID-19 wave.
International markets reacted to developments in COVID-19 globally, as well as fiscal and monetary stimulus measures. Investors extrapolated the rebound in China to the US and Europe as infection rates declined and economies reopened. However, it is essential to think carefully about valuations as many unknowns remain.
Investors should avoid making decisions based on the shape of the recovery, or invest in businesses that are sensitive to economic conditions, such as banks and commodities. Few companies are immune to economic contraction, so it is important to identify companies where management has control of growth drivers.
It is essential for investors to be nimble and find the right portfolio balance between companies that are defensive and those that are high growth, and are trading at attractive valuations. Portfolios should be defensive but also positioned for upside in order keep pace with the market recovery.
There are opportunities in online gambling in the UK and Australia, which are less penetrated than the US. Convenience stores are ripe for consolidation and an improvement in the quality of service. Luxury goods is an industry with pricing power. Investors should also retain exposure to businesses impacted by COVID-19 but are trading at attractive valuations, like aerospace and entertainment.
The Brexit process has shaken up the political leadership of Germany and France. There is currently less resistance from politicians to help in a health crisis, compared to 2009 when Northern European countries viewed Southern European countries as fiscally irresponsible. Germany has also responded to the crisis with a fiscal stimulus program.
There are many companies in Southern Europe not linked to their domestic markets. For example, Grifols, a Spanish pharmaceuticals company, and Italy’s Ferrari, both of which sell globally. Even in countries where the economy is not very strong, investors can find good opportunities.
Corporate governance and transparency with investors has improved greatly in Japan in the last decade, but still has a long way to go. The country’s response to COVID-19 demonstrates the strength of the government and institutions in dealing with a crisis. These are important elements when thinking about a country, although Japan remains a tough place to find quality growth opportunities.
Emerging markets are a very important part of an international portfolio. They have higher growth rates and good businesses, many of which can not be found in developed markets. One silver lining of COVID-19 is that it will force governments to improve in areas like healthcare and sanitation. Emerging markets could exit the crisis in a stronger position than they entered.