COVID-19 crisis: an equity perspective
In an open forum, we gather the thoughts of Filippo Rima, Head of Equities, on the unfolding fundamentals, trend shifts, and potential opportunities in the world of equity-based investment.
How does the equity market volatility we have seen in 2020 compare with previous “washouts”?
What really marks the 2020 crash out from earlier cases is the unprecedented speed of the slump in equity prices. Volatility levels became very elevated but markets remained open, liquid, and functional throughout. In the initial stages, the sell-off was completely indiscriminate but it is not unusual for the asset class to effectively become “commoditized” at such times and there has been no real panic.
Why did markets fall so quickly?
It is important to bear in mind that the crisis commenced when most equity indices were trading at, or near, all-time highs. This is quite unusual because sharp corrections typically occur when markets have either been treading water or have already begun to drift lower. As such, with indices continuing to climb through the first six weeks of the year, confidence was high and some investors were holding leveraged positions that had to be disposed of rapidly to curb losses.
Our role is to identify structural shifts and accelerating trends in order to form a view as to the types of businesses that are likely to prove long-term winners.
How would you describe the prevailing trading environment?
The movements and levels of equity indices really do not provide a complete picture. Markets have become bifurcated. Some stocks have recovered to the extent that they are now trading at, or near, new record highs, while others are languishing 40% or more below their February peaks. Fundamentals are arguably more important than ever, which means that this is a healthy environment for stock picking and potential alpha generation.
How quickly do you think the markets will recover?
As thematic and/or niche investors, we pay little attention to global equity market directionality and have no interest in making short-term predictions. Our role is to identify structural shifts and accelerating trends in order to form a view as to the types of businesses that are likely to prove long-term winners, while ensuring we only invest in companies with a strong business model backed by a robust balance sheet. This is primarily where we are able to add value for our investors.
Robotics has a huge role to play in the redesign of production lines from both a cost and a resource perspective.
Where are you finding the most compelling opportunities to invest?
Our thematic equity offering is built around four strategic pillars: security, robotics, digital health, and edutainment. All four areas are seeing, or will see, an acceleration in certain trends as a direct result of COVID-19, so it is well worth discussing each of these in turn.
Security – with home offices having rapidly become a necessity rather than a matter of choice, there is a far greater reliance on digital technology. As such, we are seeing accelerating demand for solutions that can upgrade firewalls and make systems virus-proof.
Robotics – a key theme in this area is the redesign of production chains from outsourced to domestic and from manual to highly automated. Previously, the outsourcing of production to emerging economies had allowed businesses to tap a plentiful and low-cost labor force. Consequently, robotics has a huge role to play in the redesign of production lines from both a cost and a resource perspective. The service sector is also likely to become increasingly automated with the passage of time.
Digital health – given the strain that COVID-19 has inflicted on existing health care services, it is unsurprising to see the trend toward digitalization accelerating rapidly. This is evident in developments such as “telemedication”, the remote monitoring of patients following emergency hospital treatment, and the increasing use of artificial intelligence (AI) in drug development.
Edutainment – we often refer to this theme as the “gamification” of education using entertainment technology. This has infiltrated segments of the education sector, such as home study, virtual tutorials, language learning, and mathematics. The technology could potentially have been used more widely before the implications of COVID-19 catalyzed a very rapid expansion, thus sparking a huge acceleration in the creation phase of the edutainment theme.
Can you describe the cultural impact of COVID-19?
The shifts in mental attitudes and accepted practices have been lightning quick and far-reaching. For example, it took the better part of 30 years for online sales to account for 2% of the Italian retail market. That share has increased tenfold in a matter of weeks. Similarly, there has been a cultural unwillingness for people to share their personal medical data. Now, the propensity for openness is much greater. The overall trend in working from home will remain structurally higher moving forward and companies will need to reengineer their business approach accordingly. Necessity is the father of cultural change and it is completely reshaping the investment landscape.