US equities: pause and go again?
For intermediaries only
In this article from Artemis, Cormac Weldon, US Equities Manager at Artemis, provides a brief review of this year’s tumult while also looking ahead to what else might be in store.
It’s been a curious time for markets so far this year. We’ve seen the official end of the 11-year bull market, a short-lived bear market (at least so far), and another nascent bull market, all crammed into a few months. Recent economic data has dampened the optimistic pricing in markets and we believe there is notable scope for further disappointment.
For example, and notwithstanding the positive data on US employment recently, we feel that current expectations for unemployment at the end of 2020 are too optimistic. It is difficult to see the unemployment rate returning quickly to single digits as the effects of the pandemic unfold.
Markets may be ahead of themselves
Market prices currently reflect investors’ willingness to take a positive view of economic data, as well as confidence that the Federal Reserve and Congress can and will do more to support the economy if it falters. We are back to the market levels we had at the beginning of the year. Our team regards this with a degree of caution. The negative impacts of the crisis (e.g. more home-based activity) have resulted in high valuations for some stocks, and some of this will be merited. But, particularly as the rally widens and assumptions factor in a return to ‘normal’, it remains to be seen how quickly we can go back to pre-crisis levels for many companies and sectors.
It is always true in investment that risks should not be underestimated, but it is especially important in today’s markets. Medical development could go in either direction. A successful anti-viral therapeutic drug or vaccine would represent an obvious catalyst for optimism, but a second wave of infections could provoke deep uncertainty.
A major focus for investors is the elevated level of corporate leverage. Companies will be striving to fortify their balance sheets but some simply won’t make it through the downturn, something which could be exacerbated if the recovery is less rapid than anticipated.
And two political factors are looming – one domestic, one international. A US election year is traditionally positive for equity markets, but it has been quite a ride so far in 2020. The remaining months of the year may see sectors affected by campaign promises to change policies. At the same time, president Trump’s management of the Covid-19 crisis – particularly its effect on the economy and unemployment – has made his re-election less certain. The international political factor – trade disputes between the US and China – is a slower burn but prone to bouts of heated rhetoric, something which could make the ride much bumpier for investors.
Another consideration is the effect that the raft of special economic measures will have on pricing and, longer-term, how central banks intend to extricate themselves from supporting markets.
A new mix of opportunities
We continue to favour companies that have growth characteristics and strong balance sheets. This is an investment style which has never changed for us but has become more nuanced given the environment we are now in. We have lately added to companies in sectors where re-opening and increased activity can be achieved with relative speed. Examples such as Booking.com (travel) and Dentsply Sirona (dental supplies) should be well positioned to benefit as the re-opening of economies drives up activity.
Booking.com is more shielded from the effects of the pandemic as it has relatively low overheads compared to a frontline operator such as an airline. And Dentsply Sirona provides the kind of service which is always in demand, irrespective of market conditions, and should benefit from pent-up demand as lockdowns are eased.
The change in consumer and corporate behaviour brought on by the pandemic has given rise to some interesting opportunities. Some trends which were already in place have been accelerated by the crisis. People have become more used to services such as online shopping and will probably continue using these services. Amazon has been a prime example among our holdings (although this is not only a retail story – revenues from its cloud and other business lines should not be overlooked) and video game company Activision Blizzard is another.
Some less obvious beneficiaries have seen increase in demand for their services during the lockdown period. Fidelity National Information Services has seen a strong increase in demand for its IT and payment infrastructure provision to financial services companies as lockdowns accelerate the demand for online banking.
Healthcare under the microscope
In the medical field, one of our holdings in the US Smaller Companies Fund, Teladoc, provides online and phone-based medical diagnostics. In the same pattern as people switching to online shopping and banking, there has been an increased need for online or phone diagnostics services – a new habit which is likely to persist.
Healthcare companies engaged in diagnosing, treating or vaccinating against the virus have had a lot of attention recently as a cure for the pandemic is pursued. We have not directly sought exposure to the development of vaccine or treatment as the risk/reward is too unpredictable. However, some of our holdings in the diagnostics field have benefited from the need for testing. BioRad, for example, has benefited from increased demand for its blood testing and Covid-19 digital testing kits. A more recent addition to the portfolio, Johnson and Johnson, presents stable earnings and potential exposure to Covid-19 vaccines or treatment.
The outlook for investors is always uncertain. That is why the risk premium exists. Pricing risk premia has become more difficult but there remain plenty of attractive investment opportunities. We continue to favour companies that have strong business models and balance sheets. We are more focused on valuations after the market rally and continue to believe that active management will help identify opportunities which will reward investors over the long term.
Aegon is not responsible for the content and accuracy of investment articles provided by third party asset managers. We might not share the views of the author and organisation.
Cormac Weldon, US Equities Manager at Artemis
Capital at risk. All financial investments involve taking risk which means investors may not get back the amount initially invested.
Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. The Artemis US Smaller Companies fund is a sub-fund of the Artemis Investment Funds ICVC. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.