It became clear within the first few weeks of the coronavirus lockdown that we were entering an environment that would be highly disruptive to business models.
We made the decision to stick with our overweight equity position as the pandemic spread.
Not only were markets cheaper after the sell-off but we were reassured by (and did not underestimate) the sheer size of the internationally-coordinated monetary and fiscal response.
It was also clear that there would be winners and losers – and so we focused on areas that we believed would be more resilient in a post-Covid world.
Accordingly, we added to existing positions in technology and healthcare, which in our view were structurally more defensive. We also increased our exposure to gold and Japanese yen.
Almost five months on, markets have broadly stabilised and the question now on investors’ lips is, what next?
We are not out of the woods. The virus is still relatively new, not yet fully understood, and we don’t have a vaccine.
Second waves are now happening in Europe including in the UK.
As the recent tightening of restrictions highlight in specific areas of the world, be it Victoria in Australia or Bolton in England, you cannot rule out fears that governments will impose even greater restrictions.
This would have a huge impact on economic outlooks, earnings and stock markets.
It would be very bold for anyone to say, with conviction, what the future holds but, as investors, we can only focus on what is likely to change with a certain degree of confidence.
It is clear that debt, as a percentage of GDP, will be much higher in light of the vast size of the fiscal packages implemented across the world.
UK market fears
Here in the UK, the government was absolutely right to step in, but the reality is that we are facing debt levels not seen since the Second World War.
That has an implication for economic growth and for asset classes as well.
I strongly expect government and central bank monetary and fiscal policy to be supportive for a sustained period of time, therefore it is important that borrowing costs stay low.
That will mean low bond yields for longer.
We don’t believe inflation is a risk yet as the stimulus is simply there to prevent a deflationary depression.
It is something we need to keep an eye on though, particularly if the internationally-coordinated policy responses create a lot of excessive economic activity that could trigger inflationary pressures down the line, which would impact bond markets.
Meanwhile markets have to contend with another wave of political risk, in particular in the US with the upcoming election, and in the UK with the Brexit trade negotiations.
