Global Growth and Innovation Perspectives: April 2020

by Grant Nader

From one of the fastest and most damaging sell-offs since the 1930s in Feb/March to one of the fastest and steepest market recoveries on record from the March low to end April. All this as the ‘coronavirus’ sweeps the globe.

The question on everyone’s mind is have we seen the worst of the market or is this a bear market rally and a chance to take off risk?

It is no coincidence that the market low happened around March 23rd with the S&P peak to trough move at 33.8%. Up to this point we saw swift Fed action that took place over very short time. Of critical importance in our opinion, was the key small business support package and the commitment by the Fed to buy not only mortgage backed securities but also low-quality corporate debt (junk bonds). This junk-bond support is key to supporting the smooth running and clearing of the credit markets.

For perspective, the Feds balance sheet expansion in what amounts to QE5 dwarfs the action they took in the GFC of 08/09.

Fed Balance Sheet Expansion

Key points in the weighing up the global economic and pandemic assumptions that are being priced into markets:

  • Massive and record-breaking central bank interventions and fiscal stimulus measures from global governments. All of this in incredibly rapid fashion.
  • Consensus that there is a reasonable chance of a vaccine by early 2021.
  • Economies are being re-opened, meaning the rate of job losses globally has already peaked.

However, it is also assumed that:

  • There will not be material infection relapses and renewed economic shutdowns.
  • There will be not be unexpected delays in the fastest vaccine development ever.
  • The worst of the earnings downgrades and economic impact have already been priced in.
  • The global support measures are enough to plug most of the gaps.

Weighing this up, and looking at previous recessions, we question whether the market has priced in enough of the potential downside risk.

Downside Risk

The consequence of this rapid stock market bounce is that valuations have quickly normalised, having fallen nowhere near to the levels seen in the GFC and the market selloff nowhere near as severe at this stage. Much of the market is no longer ‘cheap’.

Importantly, the stock market and the economy are not the same thing. Markets are forward looking and have often risen during recessions as they look ahead to improvements in the outlook.

The obvious risk here is that the earnings outlook post the H2 2020 recovery is materially worse than is currently being reflected, which is a realistic probability. In either event the PE ratios of stocks would need to de-rate to reflect the outlook or, stocks are going to become even more expensive making the long-term expected market returns well below historic averages.

European stock valuations

The uncertainty about the level of global growth recovery along with unprecedented money printing and negative interest rates implies there is a real risk of either stagflation or rapidly rising inflation. Paper (fiat) money will be vulnerable to deflation. In either case, hard assets and real (rather than nominal) earnings growth will be a key defensive mechanism as we head into such uncertain times.

Are there better opportunities elsewhere? We do not think so. Even though emerging markets are at multi-year lows relative to developed markets, the outlook for developed markets is far more promising due to the superior financial firepower required to support economic recovery and repair damaged balance sheets.

The ECM GIF Portfolio

The Funds top performing sectors for the month of April include

  • Cloud computing
  • E-commerce
  • IoT
  • Biotechnology
  • Fintech

There are deeply entrenched and irreversible changes taking place in all areas of society. Many of these trends that we are invested in are being accelerated by the coronavirus. As we have mentioned before we expect areas such as robotics, cyber-security, fintech, 3-D printing and healthtech to grow during and after the crisis. We believe these pockets of growth will provide outsized opportunities and insulation as we move to a post-pandemic world.

Looking ahead

Times of crisis are times of opportunity. We have repeatedly said that understanding the post Covid-19 world is key to finding companies and opportunities that will both survive and benefit from current and future trends.

Markets have run incredibly hard since the March lows, but we believe there is significant uncertainty ahead that is not currently reflected in the market. As such we are positioning the fund with a level of caution and focusing on secular growth stories and a measure of capital preservation.

Thematic fact of the month

Fintech: Mobile payments

The use of application-based payment solutions for monetary transactions via smartphones/mobiles. They are lower cost and faster than traditional payment methods. The main industries driving adoption are financial services, retail (e-commerce), healthcare, autos and transport.

The market was valued at just over $1 trillion in 2019 and is expected to grow to $7.5 trillion at a CAGR of around 28% by 2027.