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3Q 2020 US Equity Outlook: Drilling down into quality amid the rebound
Quality Growth Boutique
Matthew Benkendorf discusses the backstop provided by monetary and fiscal stimulus and the importance of paying attention to valuations.
After COVID-19 struck, economic risk increased while stock prices fell. Equity valuations naturally improved which provided a brief window of opportunity for investors to purchase quality companies at attractive prices. Given that the market has rallied substantially from its March lows, equity investors now need to be more discerning. The speed and aggressiveness of the monetary and fiscal response to the crisis have had a significant impact on the market recovery. This backstop has created a false sense of security among investors who may be likely to ignore underlying structural imbalances.
Seasoned investors understand that the market is a discounting mechanism. The US economy’s healing process is likely to be much slower than the optimism that the equity market rally has suggested. High quality businesses with reliable earnings growth can help investors offset the market volatility, which we expect will continue.
The information technology sector has enjoyed a strong run and there are merits in many tech businesses that have been well-positioned during the pandemic. However, investors must be selective and disciplined – not all technology companies are quality businesses and the sector is prone to some cyclicality.
Investors should pay close attention to valuations as that is what separates growth from momentum. While the Fed has signalled that interest rates will stay low for a couple of years, low interest rates only marginally improve assets. Investors must assess a company’s fair value and make conservative assumptions around interest rates and normalized growth rates for the business. We still see market dislocation and plenty of opportunities to invest in quality companies.
We believe active exposure to equities is critical for investors – especially in the current market environment. Opportunities are now confined to more narrow sub-segments of the market, which emphasizes the importance of finding the right businesses poised for long-term growth.
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