Where do we go from here for equities?

We believe that companies that are well positioned for the stay-at-home trend and the shift to online, including Cloud, will benefit the most. However, the market has already priced this is so many of these pure play stocks are now trading at all-time highs. Therefore, while these stocks may look attractive from a risk/reward perspective, they may not necessarily present a good entry point from an investment perspective.

We believe there are more interesting opportunities in areas that may be less obvious beneficiaries coming out of this crisis and where there is concrete pent-up demand. Across our strategies, we are buying into these types of areas where the stocks could see a recovery.

Europe has long been a large underweight consensus position so there is a lot of catch-up potential here. Valuations are also a bright spot and Europe is trading at a discount compared to other markets even after adjusting for the different sector weights.

Valuations for some large caps and some industrials, for example, stand out to us. We have added to these areas in our European and global portfolios as we view this as an opportunity to take part in the recovery and in this valuation anomaly.

European companies have historically been among the largest dividend payers but now we are seeing delays and cancellation in payment of dividends following regulatory pressure during the current crisis. Healthcare is an area we still like as we believe the dividend is safe and interesting versus fixed income.

There are some companies leading the way in testing while others in trying to find a vaccine. Therefore we continue to favor the sector as we believe it is reasonably valued and has strong earnings that have largely been undisturbed by this virus. That said, it is unlikely we will be adding much further to this area as they were relatively more attractive some weeks ago and we began to see some pharmaceuticals companies sell down. With valuations now back to levels where they started, the price gap has closed and we will be looking at other interesting opportunities, such as in the industrials sector, to add to at this stage across our strategies.

Winners in digital transformation – online, cloud and healthcare equipment companies –are the same winners as before the crisis. We are well aware of the upside and downside risk through our investment philosophy and believe that these names still present the best risk/reward in the medium term. We are overweight to some of these names particularly the large caps because they don’t have the same exuberance we see in the in the smaller cap pure plays which are more expensive now than they were before the crisis. The larger caps are in line or cheaper as they haven’t been hyped up that much. They are also the ones that have the profits and earnings power. Smaller companies are less profitable and it is unclear if they will ever reach profitability. We are tilted towards larger good risk/reward opportunities in the digital world.

Crowding can be an issue if markets change but it won't always tell you very much about future performance, as the consensus is not always right. Therefore we remain in the larger caps as we believe they tend to suffer less in sell offs which do come from time to time. It is a risk if there are dramatic changes but there has been progress in digitalization in terms of cashless payments and it is unlikely this will change when the crisis is over.

These discussions are very difficult and are less of a focus area for us because we know that support is coming from the single states. For example Germany is doing a lot to support its own economy along with other countries with good fiscal support at the state level. Europe as a whole is a very international economy so in the event of a global recovery Europe will be in a position to gain regardless of headlines such as this.