• faloncounsell

Client Update - Coronavirus - 17th July 2020

Updated: Sep 15

Markets this week have been supported by promising news from both sides of the Atlantic with regards to the development of a COVID-19 vaccine. Here in the UK, the AstraZeneca backed Oxford University Phase 1 trials are progressing well. Confirmation of this is not expected until next week, but the news was positive for markets, especially shares in Astra.

In other news the European Central Bank (ECB) kept rates on hold and had no meaningful update on the European member states agreeing on the final details of the 750bn Euro rescue fund. The Netherlands, Sweden, Denmark and Austria are still against helping out with the funding of this scheme. The news has been much more positive in China over the last month and again this week, when alleged economic data was released showing second quarter GDP growth of 3.2%, well above the predicted 2.5% forecast.

Regular readers of the weekly updates will know that our investment team have recently reduced their exposure to technology stocks, after an incredibly strong run. This positioning was reinforced this week by Netflix’s announcement that it does not expect its COVID related 2020 growth to continue, leading to a strong sell off in the stock and also the tech heavy US Nasdaq index. “Stay at home” stocks, such as Netflix and Amazon, have performed very well this year and we have been keen holders of them throughout the first two quarters. Valuations have appeared stretched more recently and unless we see more widespread lockdowns re-emerging, we are happy to await a better valuation point to move back into our overweight in holdings in this sector.

So far this year, virtually everything that has bounced the strongest and most importantly, sustained this bounce, is a beneficiary of a lockdown society. In contrast, nearly everything that reflected our “normal” lives until a month or so back, is still in the doldrums. Subsequent events have reinforced this view. As news broke last month that the UK would start to move out of lockdown, sectors such as retail, travel, manufacturing, and oil rallied hard. The hopes were that “normal” was coming soon. Reality did not take long to rear its head however and markets began to fret once more as second spikes emerged from Florida to Hong Kong, from Stockholm to Singapore. “Normal” retreated and lockdown sectors took off again. We still hold technology, healthcare and consumer staples in our portfolios, mindful of where we are in the grand scheme of COVID uncertainty, but we are also looking for other opportunities in markets that have not recovered as well to date.

We must remember that the technology sector is a very different beast to 20 years ago when the tech bubble burst due to a lack of earnings and ridiculous valuations. Today, software dominates the sector which is critical to how most companies operate in terms of functionality and efficiency. Software is more subscription-based which adds to its’ must-have rather than like-to-have characteristics and the successful software companies are extremely cash generative. We are therefore not expecting tech valuations to be proved to be in a bubble, however as sensible investors we do see better valuations for our clients in Asia and Emerging markets, without taking extra risk.


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