Where do we stand today? 2020 has been monothematic, but the coronavirus opened enough opportunities to horror headlines. Being constantly hit by negative narratives coming from everywhere, investors tend to become bearish, and we expect more negative headlines to come. The art is to distinguish the noise (most of what happens out there) from real information.
In addition to pessimistic headlines comes the fear for a second wave in terms of COVID-19. As bad as this can be, Coronavirus 2.0 is likely to be a different story than Coronavirus 1.0. People are now much more informed and aware of the matter than in February. This means that the most vulnerable among us are now better protecting themselves. The rest of the population, in one way or another, applies social distancing rules, wears a mask etc. We hope that in the future there is a good chance that the virus will expand less quickly than during the first wave.
Markets only react to unexpected news. Few events before have been as much discussed (and expected) as the second wave. Theoretically, this is therefore already priced-in and we do not expect the same market reaction as in March. Besides, when a vaccine is produced, the market will spike up as a vaccine means “the light at the end of the tunnel”. The market will be happy enough.
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However short-term market corrections (5 per cent to 10 per cent) can happen anytime. It is never a question of “if” (this is certain), but of “when” (nobody knows). Take advantage of any correction as an opportunity to buy, not to sell. (Market correction can be loosely defined as a decline that is more than 10 per cent, but less than 20 per cent. A 'bear market' is usually defined as a decline of 20 per cent or greater. Market may fall into a correction either briefly or for sustained periods—days, weeks, months, or even longer, after unsustainbly rising for an extended period.)
European equities are gaining momentum, as locally the COVID-19 crisis seems to be better managed than elsewhere. Short-term, they may outperform, but longer-term they will suffer from the over-exposure to structurally losing sectors (energy, banking, car production). Selective stock picking is the best strategy in Europe.
US stocks remain the first choice for any equity investment. Growth style should be favoured. 2020 is an election year in the US. Joe Biden seems to be on the rise and has currently a fair chance to be the next president. This would be a good news for the market as he’s a “moderate” democrat, leading to minor implications only from an investment perspective. Higher taxes, antitrust, healthcare reform and a shift towards more environmental protections seem to be the main stock market themes related to a Biden presidency.
China should be the second choice. The technical picture remains very attractive. (Technical analysis seeks to predict price movements by examining historical data, mainly price and volume. It helps traders and investors navigate the gap between intrinsic value and market price by leveraging techniques like statistical analysis and behavioral economics.)
Lower-for-longer interest rates will probably extend the secular bull market for bonds. The challenge, on the other side, is that yields are so low (if not negative) that investors need to lengthen maturities to earn something. Thus, all in all, equities still represent a better alternative to bonds, even from a yield perspective. Choosing among a mathematical loss (cash), low yields and low liquidity (bonds), and good long-term returns (equities) we would go for equities. Even if the “cost” is the short-term volatility.
- Diego Wuergler, Chartered Financial Analyst (CFA), currently heads Investment Advisory at Julius Baer