Note Précis July 24,2020: Q3/2020 – Wishful Denial a Risk

Note Précis July 24,2020: Q3/2020 – Wishful Denial a Risk We see wishful denial about health care as a risk for capital markets, for companies and countries. The full extent and duration remains obscure of damage from Covid-19. Even half a year later, global political responses have evolved from initial denial to bellicosity to hyperbole but seem reactionary. While thankfully avoiding the then allegations of torture, little seems changed in politics over science from four centuries ago versus Galileo on astronomy and now versus healthcare on Covid-19.

Governments have subsidy programs that have ballooned up debt- to- GDP ratios. The worldwide political economy leadership remains fractious. Amid pandemic, it contrasts with the exercise of leadership for sacrifice for higher purposes, for instance during war against evil but also subsequently forward looking massive spending by allies and in defeated and new post-colonial nations for funding for devastated companies, human needs and the reengagement of domestic skill sets.

Central banks have again massively added quantitative intervention. Unlike financial engineering into 2020, the primary investment advantages likely now reside in recognizing solvency needs long term focus by companies and countries alike. Despite massive intervention, not all are likely to succeed. Results for Q2/2020 show pressure. Capital market volatility likely will remain elevated.

Amid economic weaknesses, quantitative and fiscal largesse worldwide of at least $10 trillion but fractured political global cooperation, we favor portfolio diversification including precious metals. Currency volatility has been muted among advanced countries but could rise. It is already so for emerging country currencies. Recovery from Covid-19 at different rates would accentuate it. Anticipating prolonged financial restructuring, we favor diversification in asset allocation, shorter term structures in fixed income holdings and higher quality companies able, irrespective of sector, to wrest advantages over weaker competitors, as occurred post 2007 in world banking.

Notwithstanding minimal interest rates, equity valuations still have to work through changed realities amid augmented volatility. For arguably three consecutive cycles, equities have appeared momentum dominant. For two decades into 2020, S&P 500 equity prices have tended to lag, not lead peaks in earnings. In overarch across sectors and geographies, we favor strong balance sheets and demonstrable operational leadership over reliance on minuscule rates or beating consensus to justify equity performance. In the last cycle, Consumer Discretionary fervor was especially so in aspirational spending built on leverage. In cyclicals, we favor Industrials over Consumer Discretionary; and in Financials, we favor banks over non-bank financials where from the last cycle, proportionately more excess may also reside. In growth, strong balance sheet Information Technology (now market weight rebalanced to hardware and infrastructure over software/concept) and Healthcare seem better positioned than Consumer Staples.

Globally, we expect leadership from the United States will be key, especially on sector rotation with the weak link among advanced country markets being Europe, not Japan. Despite uncertainties in resources, Australia and Canada seem interesting. Instead of seeing emerging markets as a coterie like BRICs, we favor diversified countries like Vietnam and the ASEAN ; as well as India and China for heft and emergent Europe as buttressed by the European Union. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.