Amidst the challenging environment between vaccination roll-out, higher infection rates and the possibility of mutations, we take a look at the investment opportunities post-Covid and any potential risks to the recovery.
Many countries have started 2021 in strict lockdowns as they fight to slow a winter surge of coronavirus infections. While we believe the pandemic will begin to recede this year and the global economy will commence its healing process, it’s likely to be a gradual one.
Vaccination programmes have started, but the logistics involved in manufacturing and distribution mean it will take time to bring the virus under control. Furthermore, bringing the virus under control is distinct from eradicating it – it is possible that seasonal restrictions may be with us for a while yet.
Nonetheless, it’s remarkable how well the modern economy has adapted over the past year when our daily routines have changed so dramatically. Looking at industry sectors more closely, we can divide them into three segments that have been affected very differently by the nature of the virus-driven recession:
This division helps us understand how different businesses are likely to perform as the economy responds to the vagaries of the health crisis. The brighter outlook following the announcement of successful vaccine trials has already rippled across financial markets. As the recovery gathers momentum, fund managers are likely to feel increasingly confident that they can get back to their normal job of forecasting company prospects in a more stable environment.
As well as differences between sectors, from a geographical perspective some regions have contained the spread of the virus more effectively than others and are bouncing back more rapidly. In particular, many Asian countries have avoided prolonged lockdowns and kept large parts of their economies open. Notably, the rate of output in Chinese industrial production had already returned to pre-pandemic levels by the third quarter of 2020.
VIEW FROM THE MANAGER
Nabeel Abdolula | Fulcrum Investment Manager | Omnis Diversified Returns Fund
OUR INVESTMENT CASE
With the recovery heading in the right direction, we’re confident about the outlook for company profits and stock market returns. We have an overweight allocation to equities in discretionary portfolios, favouring Asia and emerging markets for the progress they have made in getting back to normal, and the UK for its relatively cheap valuation and potential upside as the vaccines roll out. We remain cautious on the equity of US larger companies. They have been driven to very high valuations by a small group of lockdown winners in the technology sector, the strong performance of which, we believe, is unlikely to continue.
