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James Klempster, CFA | 28 September 2020

The long and short
of what’s next

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This week heralds the start of the final quarter of 2020. What an extraordinary year it has been thus far. Of course, for investment managers, the key area to focus on is what next? This question can have multiple different dimensions. For example, the answer might be very different if we are focusing on the long term as opposed to the short term. We have made the point repeatedly that in the long run we will cast this virus off. It remains a truism that the virus is not unpicking the very fabric of society nor is it destroying the functioning of capital markets and as a result, from an investment perspective at least, we will get through this.

That level of certainty is possible with a long enough time line: the temporal element to conundrum remains key, however, and one of the most difficult parts of the COVID puzzle to unpick because shorter term news flow will have a big impact on markets regardless of the long term direction. This is a particularly important question in light of the past couple of weeks as we have seen, in Europe at least, a rolling back of the erstwhile opening up of economies. The first lockdown created an unprecedented supply and demand shock - which was totally of our own volition, of course – but government largesse kept economies heading in the right direction albeit at a glacial pace. Now, Europe is entering autumn, a time where seasonally one would expect to see an increase in coughs and the flu and is doing so on the back foot with rising case numbers in Germany, Spain, France and the UK as well as rising hospitalisations (albeit at a mercifully much lower rate than earlier in the year).

The acute economic pain of the first couple of quarters is behind us but there is still plenty of debate going on as to what shape the economic recovery might take. After a strong rebound in activity over the summer, there are some concerning signs out there that the recovery is running out of steam even before lockdown light was introduced. From an investment perspective, however, there can be no debate about the shape of the stock market recovery, as global stocks have bounced back almost as abruptly as they fell forming a quintessential V shape. Now that we have retraced much of the falls, the question is ‘how much is in the price?’.

The US has led markets higher thanks in no small part to a concentrated list of mega cap tech names that are benefitting from the trend to stay at home. Outside of the US, most major stock markets are still underwater year to date and as a result look to have a reasonable discount for the embattled environment that we find ourselves in today. There are risks to this view, of course, because if the growing ‘lockdown light’ moves into a more draconian curtailment of economic activity then there is a case to be made that there is more downside to come. Conversely, it also seems likely that a quick and successfully rolled out vaccine programme is not fully priced in. Hence, there is arguably both a negative potential surprise out there as well as a positive one. Placing too great a reliance on either outcome playing out would be to put a lot of faith on low quality data and such behaviour is akin to speculation. Perhaps a muddle through is the least intellectually satisfying answer but it has some merit, insofar as we are all becoming more adept at operating in a locked down manner and consumption and economic activity are seemingly continuing today rather than being snuffed out. Governments and central banks, while lacking the desire or the capacity to continue with the levels of almost limitless generosity that we saw earlier in the year, are still alive to the idea of keeping the economy ticking over, keeping as many people employed as possible and keeping businesses in suspended animation wherever possible rather than letting them collapse.

Uncertainty remains and we believe the present environment lends itself to prudent, well-diversified portfolio management. It is in these sorts of environments that we are reminded why we target delivering outcomes for our clients over their time horizons because performance against peers or a benchmark just might not cut it in the years ahead.

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