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Multi Asset Perspectives: growth in a post-pandemic environment

02 July 2020

GAM Investments’ Julian Howard outlines his latest multi asset views, discussing the equity market rebound following the falls of March and why he believes focusing on secular growth should transcend the coming stagnation.


If the first quarter of 2020 was characterised by waterfall moves in markets, the second quarter saw an almost equally sharp rebound, with the MSCI AC World Index in local currency terms up nearly 18% from the end of March to 30 June. For many market commentators, it was hard to square the desperate fundamental picture of an economic crash and plunging corporate earnings outlooks with a buoyant equity market. Little wonder therefore, that the move was described as the ‘hated rally’ in some quarters. A fast and comprehensive response from policymakers went some way to explaining the rebound. Central banks across the world rushed to reduce interest rates to or towards zero, while fiscal rectitude was abandoned as governments sought to incubate workers until the economy could be opened up again. Highlights of this ‘new responsiveness’ by the authorities included the UK’s more than nine million workers on government furlough and the US Federal Reserve’s stated willingness to buy corporate bonds outright to ensure a continued flow of financing into the private sector. For all the largesse though, the profound long-term economic damage was soon becoming apparent as consumption plunged and many already vulnerable businesses in the US, UK and Europe ceased operating. In late June, the International Monetary Fund (IMF) revised down its world economic growth outlook for 2020 to -4.9%, while Bloomberg consensus estimates for US GDP growth for 2020 plummeted to -5.6%, having begun the year forecasting nearly +2.0%. This fundamental picture sat uneasily with the equity market recovery described, see Chart 1. But it was not as simple as the market being ‘wrong’ or ‘stupid’. Underneath the headline moves investors were coolly assessing potential winners and losers in the months and years to come. Cyclical stocks rightly suffered amid this ‘great re-allocation’, while those areas deemed to have a promising future, notably technology, fared so well that they were able to drive the entire market upwards. For the latter, US corporate tax cuts in previous years ensured more cash reserves were onshore and immediately available, which in turn facilitated ongoing acquisition and investment. Little surprise therefore that by the end of the quarter, the technology heavy Nasdaq 100 Index in the US stood higher than at the start of the year.

Chart 1: The ‘unexplained’ chasm – markets de-couple from fundamentals:

Source: Bloomberg, data as at 29 June 2020

Past performance is not an indicator of future performance and current or future trends. For illustrative purposes only.


Equity allocations were maintained, facilitating meaningful participation in the market rebound as investors favoured thematic, secular growth over uncertain near-term cyclicality. The emphasis on the US equity market over Europe and the UK and, stylistically, growth and technology over value was especially helpful during the review period. While value investing had some good days (with one car rental stock notably up 600% in a single day earlier in June), growth stocks dominated the overall narrative. This theme was combined in equity portfolios with other secular growth sources such as emerging markets, environmental, social and governance (ESG) investing and specific decarbonisation. In fixed income and credit, developed market corporate bond spreads tightened as fears of mass defaults receded and central banks offered direct intervention in credit markets. This was constructive for portfolio allocations to short duration high yield and European subordinated financial debt. Short-dated, high quality investment grade bonds that had seen some stress in the first quarter were also quick to recover their poise in the second. Away from corporate bonds, non-agency mortgage-backed securities (MBS) paper made steady progress from its earlier sell off. Insurance-linked bonds maintained their independent course which had been so vital in the previous months. With government bond yields in developed markets generally below 1% and offering less future diversification, allocations to the asset class were modest. In alternative investments, recovery was in evidence but capital preservation in portfolios remained primarily centred on ‘alt-bonds’. Finally in tactical asset allocation, the modest equity allocation built up during the market falls was broadly maintained. This was complemented by short-dated Treasury bills, ready to be re-deployed in the event of any further market volatility.

Chart 2: Stagnation strikes, unlikely to be reversed by coronavirus:

Source: Bloomberg. As at 30 December 2019. For illustrative purposes only.

Past performance is not an indicator of future performance and current or future trends. For illustrative purposes only.


In the last few months analysts have breathlessly opined on how the world economy is set to completely change, whether in the form of the service sector having to adapt to face masks and new hygiene measures or physical offices becoming completely ‘redundant’ like so many of the workers who once inhabited them. Time will tell on such specifics, but as we survey the global economy and capital markets the most notable change is most likely to be in the form of a sharp exacerbation of existing trends. Deep secular stagnation is surely now beyond the debate stage, see Chart 2. Only the most optimistic economists are arguing that the post-pandemic recovery could possibly result in a stronger trend rate of growth than previously. The indications instead point to a far more profound malaise. Demographics remain as challenging as ever, but now a new regime of ‘masks and metres’ will ensure structurally higher unemployment as entire sectors become marginal. In addition, innovation and productivity will slow as many firms switch from ‘just in time’ to ‘just in case’ and start hoarding cash. Technology, already cash rich, offers a rare exception. Meanwhile government fiscal positions – which have deteriorated dramatically within the space of three months – mean there is less room to pick up the slack despite optimistic talks of a ‘New Deal’ in some quarters. Crucially, doubts remain as to whether central banks can continue to buy up government issued debt without long-term legal or inflationary consequences. The ironic conclusion to this frankly grim outlook is that zero (or negative) interest rates will continue to push investors into risk assets if they are to have any hope of accruing meaningful returns at all in the future. This is not to say that simply holding a market index is the answer. We believe instead that thematic equities which can transcend the impaired economic growth outlook have a relatively bright future. Complemented by sensible capital preservation strategies where appropriate, investors can still plan to achieve meaningful growth objectives in the post-pandemic environment.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.