In a World Where the Rules of the Game Are Changing, Offense is the New Defense

As seen in the Wealthmanagement 2020 Midyear Outlook
Stuart Katz, Chief Investment Officer, August 2020

The uncertainty of our current world and the effects of COVID-19 has raised intense questions that affect each and every one of us, and are central to the way we live our everyday lives. It has brought forth deep-rooted fears about how our country will move forward. History is the best guide to understanding and adapting to any given situation, but in this case, there is little in our past we can look to for a clear path forward. As financial advisors, it is imperative for us, in these turbulent times, to stay grounded in strategies of logic – utilize our experience—and use these tools to create and maintain durable portfolios for our valued clients.

New Opportunities Lie in Current Challenges
The financial disruption we are currently facing is further complicated by uncertainty about (i) the path of the virus, (ii) deteriorating US – China relations, (iii) shifting behavioral consumer demand patterns, (iv) corporate profits recovering to pre-crisis 2019 levels in a few years, (v) rising defaults, downgrades and bankruptcies surpassing the Great Financial Crisis records, (vi) rising taxes, (vii) elevated geopolitical and social tensions and (viii) inflationary and growth concerns due to massive fiscal and monetary stimulus and supply chain disruption. To begin our journey towards recovery, we must confront this uncertainty with near term safety and long-term growth.

For the remainder of 2020, we anticipate seeing a bounce off the Q2 global economic shutdown bottom and a slower and longer recovery period afterwards. It appears the risk markets have a more optimistic view: stock multiples have expanded dramatically in equity markets while 10-year Treasury yields, investment-grade and high yield corporate bond spreads have collapsed in credit markets.i Additionally, the uneven reopening efforts across the world have triggered more infections in some locations. We believe that rolling, localized shutdowns will generate elevated volatility – only once employment and consumer spending conditions steadily improve will optimism in the markets persist. We are also closely monitoring if July provides further economic support packages and permanent adoption of the European Recovery Fund, as the fruition of this would potentially create a sharp rise in markets.

Passive Approaches Will Struggle
With high levels of dispersion in the markets, it is more important than ever for investors to consider partnering with active managers and employing alternative strategiesii, if appropriate, that can benefit from a proven fundamental targeted security selection process and judgement on things such as cashflow generation, management teams, business models and balance sheets. We believe this action plan is the best portfolio defense in a volatile market.

The post pandemic world is set to be filled with technological innovation and increased focus on ESG as a transmission mechanism for value creation. Combine this with accelerating trends in remote work, cybersecurity, e-commerce, healthcare innovation, digital infrastructure and emerging markets, which are only useful when focusing on high quality companies.
Our view is that the remainder of 2020 will likely show a weakened US dollar. Selective and smaller non-cyclical stocks could outperform and inflation linked bonds may become more attractive to patient investors. However, the second half of the year may be more broadly defined by who is winning, and who is losing.

Disclosures

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