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Our new Key Investment Themes

What Key Investment Themes can help navigate the COVID-19 crisis?

Our Top Market Takeaways for April 17, 2020.

Markets in a minute

The more things change…

The differences between the pre-COVID and post-COVID worlds are starting to come into sharper focus.

We have spent a lot of time on the changes in markets. Airline stocks have lost half of their value this year. Restaurants, hotels and leisure companies have lost 30%. Before the COVID-19 shock, high yield bond markets were suggesting default rates of around 1%. Now, high yield markets are pricing in something like 7%–8% default rates over the next year, which would be the highest since the Global Financial Crisis.

In the real economy, the job losses have been historic. Over the last four weeks, 22 million people will have filed for unemployment in the United States. These four weeks of new jobless claims have completely offset the job gains that had been accruing since 2010. It would not surprise us to see a headline unemployment rate of 20% during the COVID-19 recession. That would mean the unemployment rate will have spiked from a 50-year low to its highest level since the Great Depression.

Bar chart shows the number of U.S. jobless claims over the last four weeks for the weeks ending in March 20, March 27, April 3 and April 10, 2020, against the cumulative job gains from 2010 to present day. It indicates that these are relatively similar in value.

Description: Bar chart shows the number of U.S. jobless claims over the last four weeks for the weeks ending in March 20, March 27, April 3 and April 10, 2020, against the cumulative job gains from 2010 to present day. It indicates that these are relatively similar in value.


Social distancing has had a very real impact on the consumer, and retail sales are plummeting as a result. Sales at gas stations have fallen by 20% relative to a year ago. Sales of apparel are down by 50%. On the other side, sales at grocery stores are up 30%.

The demand for liquidity is unprecedented. All of the ~$350 billion allocated to the Payroll Protection Program from the CARES Act has already been earmarked for businesses around the country. In addition, commercial banks funded over $300 billion of commercial and industrial loans in the last half of March. There is no other three-week period back to 1975 that even comes close in terms of notional dollar amount borrowed. It is not too much of an exaggeration to suggest that every business in the country wants to borrow at exactly the same time.        

But, as the saying goes, the more things change, the more things stay the same.

Before the sell-off in the stock market, Microsoft, Apple, Amazon, Alphabet and Facebook were the five-largest companies in the S&P 500 (making up around 20% of the index). As of yesterday, Microsoft, Apple, Amazon, Alphabet and Facebook were still the five-largest companies in the S&P 500 (making up around 20% of the index). No, Zoom Video Communications hasn’t broken into that club, yet.

In the same vein, “growth” stocks (those with the best perceived prospects at future earnings growth) are outperforming “value” stocks (those that seem the cheapest) by 17.5% this year. Over the last 10 years, growth stocks have outperformed value stocks by 130%. So far this year, U.S. stocks are outperforming stocks in the rest of the developed world by 9%. Globally, energy companies are the worst-performing sector (down 45% so far), just like they have been over the last 10 years. Nothing new here.

In Europe, the cumbersome constraints inherent to the European Union and the Eurozone are hampering a coordinated, consistent response to economic strains. Again.

The COVID crisis has also accelerated trends that were already in place, and the market is noticing. The FANG+ stocks (Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Netflix, Nvidia, Tesla and Twitter) have actually returned over 11% just this year.

As the narrative on COVID-19 continues to evolve from phase 1 (containment) to phase 2 (safe reopening of the economy), we are assessing what will change and what will stay the same. It will be crucial for investing success.

At the same time, we are organizing our thinking around three new Key Investment Themes:

1) Navigating volatility

2) Locating value in dislocated markets

3) Durable trends for the coming years


Our new Key Investment Themes

The COVID-19 pandemic has upended daily life, halted the economy and shattered asset valuations. The recent market volatility has reminded us of the importance of adhering to our investment principles and building portfolios that are aligned with investors’ long-term goals. In short, our three themes align with our broad outlook. First, we are approaching the near term with an abundance of caution. Navigating volatility by mitigating downside exposure is a key focus. Second, heightened volatility presents opportunities to those who are willing to take advantage of dislocations. We are being aggressive and disciplined about these opportunities. Finally, we are optimistic about the coming years, and believe that digital transformation, healthcare innovation and sustainability will define the contours of the next recovery.  

Let’s dig into each.

1. Navigating volatility:

Volatility across asset classes spiked in March to levels not seen since the Global Financial Crisis. The COVID-19 shock was a stark reminder that proper diversification and downside mitigation are critical to investment success. We are focused on strategies that are designed to diversify risk exposures and have a keen focus on protecting capital during drawdowns. True, the VIX (an implied measure of volatility for the S&P 500) has come down from all-time highs, but a VIX Index level of ~40 means that the market is expecting a ~2.5% move every day for the next month! Volatility looks very likely to persist.

Safe havens like gold can help you weather the storm. Deposit strategies and short-term fixed income are attractive, relatively low-risk options for capital. Further, we are focused on managers that have a proven track record of mitigating drawdowns during market sell-offs, while offering commensurate upside capture.

2. Locating value in dislocated markets:

The COVID-19 shock also created a rush to the exits in many assets. Many investors sold what they could, not what they wanted to. This creates opportunity for those with capital to take advantage of assets that are trading at levels that do not reflect their fundamentals or our view of the future. As dislocations are often fleeting, we will be regularly updating the opportunity set for this theme as market conditions change.

Right now, high yield debt (specifically BB-rated bonds, excluding energy) looks attractive, given the severe default cycle currently suggested by spreads, specific stocks that are challenged in the near term seem to be offering compelling entry points, and even the usually steady municipal debt market has exhibited uncharacteristic turbulence that we think presents opportunity.

3. Durable trends for the coming years:

At the beginning of the year, we were focused on three megatrends we thought would drive growth into the next decade: digital transformation, healthcare innovation and sustainability. While the COVID-19 shock brought macro volatility back to the forefront, we continue to believe that these trends will drive growth into the next decade. The pandemic, if anything, is likely to accelerate these trends around the world. The digital economy is flourishing, healthcare innovation will provide the ultimate solution to the crisis, and sustainability issues such as food supply and pollution have also been exposed.

Digital transformation: The need for sophisticated technology has become all the more apparent with entire populations forced to stay at home. Scientists are also using artificial intelligence (AI) and Big Data in healthcare to develop ways that will help identify infected individuals, clean contaminated surfaces, and treat—as well as prevent—infection.

Healthcare innovation: At the center of this crisis is human health. And the fact that healthcare systems have been quickly overwhelmed makes the case that innovation is needed to combat this pandemic—and others in the future. This process will likely be a tailwind to top-line revenues in much of the healthcare sector for years to come.

Sustainability: Any problem with the natural world puts humans’ impact on it onto the policy agenda. Additionally, as markets have broadly sold off, ESG funds have noticeably outperformed: While the MSCI World is down -16.7% year-to-date, the MSCI World ESG Leaders Index is down -15.5%. Additionally, according to Bloomberg, ETFs following ESG strategies are seeing net inflows despite the sell-off.

These themes provide a framework for how we are investing through the COVID-19 shock, and help to complement a goals-based portfolio that is aligned with an investor’s plan.



All market and economic data as of April 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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