When anxieties about the spread of the coronavirus gripped markets in March, and sent share prices into a free fall, investment managers, fearing the complete destruction of the world economy, took fright and looked about for the quickest escape route.
Five months later, markets have recovered their losses with Wall Street trading at peaks. Investment managers, though, are still eyeing the door, concerned, this time, that lofty equity prices bear no relationship to the woeful underlying economic conditions.
Yet, with governments and central banks committed to supporting their economies over these difficult times, and interest rates in most of the rich economies certain to remain close to zero for years to come, there is no reason equities with positive earnings growth should not retain their appeal over other asset classes.
The probable introduction of a vaccine to beat Covid-19, expected within months, will only reinforce demand for equities on the prospect of the world returning to normality. Ridding ourselves of the terrors that have kept us homebound for so long, consumers will reward themselves for those months of seclusion by unleashing a tirade of spending on bags from Louis Vuitton to new golf clubs from Callaway.
Hence, the prevailing view is that investors will swap their “stay-at-home” winners like Apple and Amazon, for “stayaway” losers like Citibank and Chevron. Sure, we can expect some rotation, but, more than likely, the switch to these stragglers will be short-lived.
The most notable outcome of this extraordinary period that we are living through is that it has taught us to do things that we had previously resisted. It has evolved attitudes and mindsets that will drive new business models and destroy old ones.
So, in the next few years, trends such as cloud, big data, e-commerce, e-learning, streaming, gaming, automation and robotics that were shaping industries before the virus struck, will intensify their reach, hastening the transformation of global economies and offering investors exciting growth opportunities.
Though 5G will be introduced commercially within the next year or so, it is still early days, and the benefits of this revolutionary science will only unfold in the next four to five years, extending the dominance of technology shares on equity markets.
The implementation and adoption of 5G will pioneer applications like autonomous driving, tele-surgery, the Internet of Things and other applications that were not feasible because of the limitations of 4G. Besides the existing platforms — like Facebook and Alibaba — that will gain from the launch, infrastructure businesses associated with the development of 5G — such as ASML and Ericsson — will also profit tellingly.
Outside the allure of the digital economy, the most telling theme that will dominate investment flows in the future will be an obligation for business leaders to adhere to strict standards of ethical conduct and to support the call for clean air. Companies using or distributing solar and wind power will trade at significant premiums to the traditional energy providers, while electric vehicle makers will edge out the customary combustion engine manufacturers.
With persistent talk of stretched valuations and slowing earnings growth, reservations about the height of the equity markets will press money managers to search for the nearest exit. I’m not going stop the chatter, only to say that if you’re going to make me worry, I’d rather worry feeling a little richer than poorer.
• Shapiro is deputy chair at Sasfin
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