Acceleration

Well, what an extraordinary few weeks it has been since my last note. I had hoped to write with a little more frequency over the past month, but there has been little to add to the comments we made at the end of March.

In that note, we discussed the extreme level of ‘fear and panic’ evident in markets during March and that the valuation of equities had reached historically attractive levels relative to bonds. We also noted the singular focus of governments and central banks on helping the economy get through this period.

We concluded that, whilst we must respect the potential unpredictability of this tragic health crisis, there were grounds for optimism.

Whilst we had high conviction that long term investors would be well served adding to equities in March, we have been surprised by the swiftness of the recovery, with the world equity market up nearly 30% since the March low.

Of course, this is not to say markets can’t give back some of their recent gains and at our investment committee meetings we readily entertain the possibilities of both a re-test of the March low and a move to new record highs. We believe we must be open to, and prepared for, multiple scenarios from here.

In saying this, we believe there is sound reason to believe that the mid-March low represented an historic low, given the level of panic in markets, and we find it very hard to reconcile too bearish a view with the performance of the leading technology platforms in recent weeks. For example, how is Amazon breaking out to all-time highs consistent with an ongoing bear market?

Now of course we must recognise that Amazon is uniquely well positioned for this crisis, but they are not alone.

In our last note, we hypothesised that this crisis could accelerate prior trends, including innovations in healthcare, energy and e-commerce, and we have certainly seen this over the past few weeks.

Of course, this is not a new topic for us, and we have been discussing how to both protect and benefit from technological disruption and innovation with clients for several years now.

However, it is still startling to see the divergence between the winners and losers since the crisis began, with the accelerated adoption of technology-driven 21st century business models. The future really has been brought forward and we can see this in the performance of telemedicine companies, e-commerce companies, media streaming and digital payments leaders.

Whilst in some cases the ‘winners’ are seeing a short-term boost, which should not be extrapolated, in many cases we are seeing an accelerated adoption that will likely stick and the rational response is to place a higher value on these companies.

The flip side of the pretty extraordinary performance from the beneficiaries of ‘digitisation’ and technological adoption has been the performance of companies which arguably represent challenged, 20th century business models, including oil companies, real estate and banks.

This is not to comment on any one company, and I am sure there is some value amongst these sectors now, but the relative performance is striking.

In previous notes we have highlighted the very low weighting in European markets to the technology sector and the high weighting in capital intensive business models. This index composition is very evident this year, with the Eurostoxx 50 underperforming markedly, down c.21.5% year to date, compared to a decline of c.9.5% for the world equity market in euro.

Now we are very aware of the argument that so-called value stocks are trading at historically cheap levels relative to higher growth technology stocks and perhaps the Eurostoxx 50 will go on to outperform the S&P 500 over the next few years.

However, we have been persuaded for some time now that we are living through a period of remarkable technological change and we continue to think deeply about how to best position our clients’ irreplaceable capital to navigate this time in history.

In the short term, we of course have no idea how markets will behave or react. Whilst we retain a positive outlook, we remain open to multiple potential scenarios, as we feel we must, given the unprecedented nature of events.

However, over the long term, we remain very confident in how we have positioned our clients’ portfolios to deliver attractive returns above inflation.

As always, please do not hesitate to contact us to discuss our views further.

Ian Quigley
T: +353 1 421 0300
E: ian.quigley@brewindolphin.ie

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