Our base case remains that the global economy will continue to improve, although at a slower pace than what we have seen in the third quarter. Monetary policy will maintain a floor under the economic momentum, while fiscal policy, with some occasional cliffhangers, will also offer a helping hand. Overall, this means support for global equities, particularly as the earnings yield derived from current valuations remains compelling in the current low interest rate environment.
We have hit a road bump. But not an unexpected one. While a second Covid-19 wave is not a blue-sky scenario, it is also not the end of the economic pick-up. Importantly, we are closer to the end of the sources of uncertainty than to the beginning, whether it is the US elections, a Covid-19 vaccine or the approval of more therapies. Even Brexit, while still unclear, can be pinned down to a range of – admittedly not great – scenarios.
When looking for investment opportunities in these market conditions, there are two areas where we focus our search: where the recovery is yet to be priced in, and where the recovery is far more advanced on a relative basis. The first is quality stocks with resilient fundamentals, that haven’t benefited from Covid-19 (and hence have not enjoyed the all-things-digital rally) and may have faced a temporary setback in business momentum, and the second remains North Asia, as China, South Korea and Taiwan continue to manage the pandemic remarkably well on a relative basis.
Following this principle, our investment teams have continued to selectively take profit from stocks with stretched valuations and have added to quality laggards that are expected to benefit from recovery in some (but not all) areas of the economy. For all of the teams, in the choppy waters of macro uncertainty, stock selection has kept the rudder steady.
Some stocks will need longer to recover from the post-Covid-19 effects, if they ever will, and it is wise to continue to avoid them until we get more clarity on what the future holds. Importantly, in a news-driven volatile market, staying patient and picking our entry points was and remains the name of the game.
Looking ahead, both our Emerging Markets and Developed Markets teams have maintained their neutral outlook in their five-factor framework. Neutral, in this case, stands for cautious. Technology stocks remain an overweight in many of the portfolios. This is true also for US technology, although we have been actively lowering the position.
North Asia and Europe remain the largest overweight positions in our global portfolios. Within Emerging Markets, we are also selective at a country level, and while we have continued to increase our positions in China, Taiwan and South Korea, we remain cautious on Latin American and EMEA economies.