Portfolio Manager Jeremiah Buckley discusses the elements that have helped to spur a rebound in equity markets and the factors that can help the budding recovery continue.

  Key Takeaways:

  • A rebound in equities has been fuelled by tremendous monetary and fiscal stimulus,
    measured reopenings and signs of progress in COVID-19 treatment and vaccine development.
  • In order to sustain a recovery, we will need to see continued improvement in consumer and business confidence, and the country will need to address issues such as the redeployment
    of the labour force and enduring geopolitical tensions.
  • Certain investment themes have come into focus as the economy begins to recover,
    including the importance of healthcare innovation, an increased need for network and data resources and an emphasis on home-related spending.

 

 

Jeremiah Buckley: There were a number of factors that drove the strong performance in the second quarter for the equity markets. First, we saw some stabilisation and the impact of the pandemic, which led to a number of states and countries continuing to open up their economies at a slow pace. We also saw quite a bit of progress from the treatment and the research on vaccines to potentially impact the severity of this virus, which would allow us to continue to reopen economies. We also saw an unprecedented amount of fiscal and monetary stimulus that helped the economy stabilise during the quarter, which made a much better environment for riskier assets like equities.

One of the factors that we need to continue to see improve for the continued recovery of the economy is increasing consumer business confidence. We need consumers to be confident to be able to spend and go out and start to travel again. We need businesses to continue to focus on hiring employees back, to continue to spend on capital, to continue to grow their businesses over time. Obviously, the main factor that will continue to drive that will be containment of the virus and our ability to continue to open up the economy in a safe way.

One of the factors that could be detrimental that we also need to watch is the redeployment of labour. So, with the major shift in how the economy will function going forward, there will be some of the labour force that will be dislocated. We need to make sure that that part of the labour force is retrained and redeployed into different areas of the economy, so that we can get the unemployment rate back to where we were prior to the pandemic. One of the other risk factors that we continue to watch are geopolitical concerns. We need to continue progress on trade and continue opening up the global economy. And if we see setbacks related to that, we could see a slower progress in the economic recovery.

One other positive for investors in markets is there is still a substantial amount of cash on the sidelines. So both consumers have put a lot more cash into bank deposits, but businesses also have a lot of cash on the sidelines based on a lot of the debt issuances that they have done over the first half. We have seen a record amount of debt issuance, so that those companies have dry powder, and to the extent that we start to see those companies invest that money back into the business or potentially in mergers and acquisitions, that would help the economic recovery.

As a result of the pandemic, certain themes within the economy and the market have accelerated and others have continued. We have seen an acceleration in e-commerce spending, so more people are shopping from home. And we have seen probably three years of market share growth for e-commerce players come in in a matter of months. That has implications for another theme which is the shift to e-payments. Obviously, all of the e-commerce spending is done over a credit card and so that shift from cash and check to e-payments has really been accelerated through this. Certainly payment volumes have been impacted by overall spending, but we believe that that theme has been accelerated. Another theme that has materialised as a result of the pandemic is just the need for continued research and development investment in the healthcare sector.

So, certainly we have come to a period where we need to continue to invest in diagnostics. We need to continue to invest research in treatments, in vaccination programmes, and so that investment has become even more important in an environment like this. And we believe over the next number of years that investment will continue to be good for a number of companies in the healthcare space that have been investing in research and development and will continue to benefit from these trends.

As a result of this environment, we have also continued to see unprecedented demand for network and data usage. We have seen opportunities within the equity markets to invest in the suppliers to these trends, equipment suppliers, but also hosting suppliers and companies that are providing those cloud services, that have become even more important in an environment like this where people are working from home or schooling from home.

The last trend that I want to touch on is the importance of home. People are spending more on home to make sure that they are able to work from home and school from home as well as to have their entertainment from home, and this has led to a lot more time and money being spent on home improvement spending. We have seen the benefit of those companies that have invested in that direct-to-consumer relationship and those distribution capabilities to benefit from this environment and take advantage of that extra demand that is being driven by a greater amount of time that people are spending at home.