Thursday, July 23, 2020
Niall Gallagher discusses the opportunities in European equities and whether we are moving into a “returning to growth” phase post Covid-19.
Even if there is a second wave of infections, will we remain out of lockdown?
We have obviously been through a tumultuous time, economically, in terms of the impact of lockdown. Where lockdown has been lifted, the evidence is fairly clear that there has not been any significant second wave. There have been micro ripples in Germany, China and the US, but the overall death rate continues to come down, including in Sweden and the US. The evidence appears to be that wherever lockdown has been lifted, the death toll has continued to decline. There is a risk of a second wave later in the year; however we have had time to learn about this pathogen, hospitals have had time to increase their ICU capacity and we have had the opportunity to trial various drugs to combat the illnesses of those impacted.
Are we entering a ‘return to growth’ phase for markets and economies?
Unequivocally yes. The key question is whether we are seeing either a bounce back or, hopefully, something more sustainable. Looking at credit card data in the US, as well as mobility data, it is clear that there is a significant recovery across many markets. Starting in China, South Korea and Japan, where many of the social distancing measures were applied first, we have seen many sectors return to pre-Covid levels of consumption. Travel, both international and domestic, remains heavily impacted. In terms of consumption of consumer goods, however, we appear to have returned somewhere close to pre-Covid levels. Even in the US, we have seen a significant bounce back in consumer confidence and consumption. The same is true across most of Europe, although the outlier appears to be the UK. There appears to be a higher level of cautiousness among consumers in the UK than elsewhere in Europe, but broadly speaking the surprise has been to the upside in terms of how quickly things have come back. There remains the risk of a second wave, which could lead to either policymaker action or consumer caution. We believe that there are reasons to think that what we are seeing is sustainable. Furlough schemes have helped consumers maintain a similar level of income, which has remained in bank accounts as restaurants, bars and cinemas have remained closed. Provided confidence returns and there are no further lockdowns, we believe we should see a significant pick up in spending; if this carries on we will not see a large rise in unemployment or a catastrophic drop in demand, which could occur if there was to be a second lockdown. We think we are in the beginning stages of that recovery.
What does this mean for your asset class?
We think the outlook for European equities is good from here. The asset class in euros is slightly lower than where it was in February; there are a number of areas that we believe will benefit, the first of which could be referred to as the ‘recovery sectors,’ such as construction & building materials, automotives, industrials and consumer. We anticipate a recovery in spending that can boost the earnings of those businesses. Those companies will have experienced a significant drop in their revenues and profits between March and May, but assuming no further lockdowns, they should experience a strong rise in pent-up demand followed by a sustained recovery into this year and next. We would hope for some of these companies that 2021 will not be much lower than was originally forecast. We remain more cautious on travel, although leisure has the chance to rebound somewhat over the summer. Furthermore, some areas have experienced an acceleration of trends that were already in place. This includes increased penetration of online spending and away from brick and mortar into online commerce. We believe this is likely to be a permanent increase in opportunity for those companies. We have also seen a greater switch from cash into card and online payments. We believe the area of digitalisation and the need for companies to operate remotely will continue to expand, which will benefit many software and hardware IT companies. Finally, the area surrounding ‘greening’ the economy should continue to benefit, including an increase in buildings which are more thermally efficient and the electrification of cars. In our view, these things will benefit from current government fiscal measures and see a structural acceleration.
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. Reference to a specific security is not a recommendation to buy or sell that security.