Gradually preparing for a rotation

We also highlighted the importance of being selective from an individual stock viewpoint, as once the earnings impact became clear, we would start being able to distinguish the winners from the losers. We still stand by those statements, and were not surprised by the performance concentration that we saw over the last three months.

So, what comes next? More of the same, but with less tempo. A cooldown, if not a pullback, of equity markets is now overdue. The tech-savvy stocks that have driven the upside in both developed and emerging markets may not plummet, but it is difficult to see them continuing to perform at the same pace. The next stage of market upside will have to come from the more cyclical stocks. These, however, need better visibility on an economic pickup than what we have now.

A lot will depend on how Covid-19 continues to spread. Some countries that seemed to be over their contagion peaks are now back to seeing cases rise, with the US being the most glaring example. How these new increases will be managed will have a strong impact on the shape of the global economy. We are clearly not in a V-shaped recovery. For now, we believe we are looking more at a ’U’.

Until the virus is under control, from a regional perspective we continue to favor countries that have been dealing more effectively with the outbreak. This means looking at North Asia and Europe. From a stock selection perspective, and given the extreme valuation differentials, our teams have been taking profit from some of the high-flying compounders and have added to cyclicals and stocks that had seen adverse price action, but still have solid fundamentals.