A sector focus is now appropriate rather than blanket market exposure
Following the recent recovery, we believe investors should take the opportunity to carefully review portfolios to ensure that equity risk is focused on the right companies and sectors. The release from lockdown in Europe and the US is a welcome development but also appears to be a more drawn-out and progressive affair than that seen in China earlier in the year.
Certain sectors are likely to see significant constraints on activity for a number of months ahead. Notably, “stay at home” orders for returning overseas travellers would be likely to have a strong negative impact on both business and leisure demand in the travel and hospitality sectors during the summer season.
We believe the behavioural changes in terms of social distancing are likely to persist where they have simply accelerated long-term trends in terms of the environment or digitalisation of the economy. Many businesses have now demonstrated that they can function with a significant degree of home working, allowing further compression of future office requirements. This also has implications for ancillary activities such as retail in business districts, as employees benefit from flexible hours and retail shifts further online.
Similarly, we suspect many corporates will take the opportunity to insist on travel only when it is absolutely necessary in future, initially to reduce the risk of COVID-19 infection but later to reduce corporate expenses as online business becomes an increasingly acceptable way of working. Progress in these areas implies a bright outlook for the digital alternatives to face-to-face communication. We expect a resurgence in growth in the full suite of digital remote working tools, from secure cloud-based corporate storage and application delivery to telepresence solutions.
Videoconferencing has traditionally been difficult to monetise and software as a result dated and clunky but further quality improvements should be expected to narrow the perceived quality differential between an actual and virtual meeting.
From an environmental perspective, less frequent transportation usage and a smaller office footprint has obvious environmental benefits both in terms of urban air pollution and global energy usage and the coronavirus episode will have highlighted wasteful and unproductive carbon emissions which can now be addressed.
Despite the upcoming release of lockdowns, as market valuations have already rebounded significantly from the lows of March we retain a neutral weighting to global equities. Should social distancing, contract tracing and testing measures sufficiently slow the spread of coronavirus post-lockdown, we expect economic activity will gradually return to normal over the next 12m, even if punctuated with further lockdowns in specific regions or cities, allowing risk premia in equity markets to contract further.
On the other hand, relatively high degree of compliance with lockdown instructions has left the population with very little immunity and a second wave of infections cannot at this point be excluded by any means.
Given the rebound in market valuations, we believe investors should be increasingly specific in terms of sectors and specific companies rather than pursuing blanket market exposure. There are some sectors such as healthcare and software which may pass through this episode virtually unscathed, leaving others dealing with the aftermath for up to a year, or least until a vaccine becomes available.
The Edison Group