In the midst of a global recession investors have rightly focused on the depth, duration and consequences of the coronavirus led crisis. As we begin to emerge from isolation and focus more on the post-Covid world,  it is important for investors to think about the longer-term implications and focus on the evolving and lasting changes that is emerging from this crisis.

 

I highlight below four key themes which I believe will accelerate into 2021 and beyond:

 

1. Accelerated Digital Transformation – The increased need for digital experiences (forced by the global pandemic) across both the consumer and commercial landscape has accelerated the shift from physical to digital assets. We see increased opportunities around multiple sectors currently in the throes of digital transformation and a growing awareness and spending on software enabling these changes.  The growing acceptance and penetration of non-traditional assets such as crypto currencies are a sign that there are still many changes to come.  

 

2. Social Behavior – While humans are naturally social, we think certain long-term changes are likely. Some, or many, will be hypersensitive around cleanliness and large gatherings (impacting bar and restaurant traffic, sporting events). For others, we see less travel and tourism – again a world less global, with implications ranging from the airlines to luxury goods as well as of course leisure. We also see an elevated level of Work From Home (WFH) culture. However, we think once the virus subsides, we will return to a WFH level higher than pre-virus. This likely has longer-term implications. We believe this could push organizations faster to the future in terms of cloud and Software as a Service (SaaS) adoption as well as their own digital transformation. As a result, we think security looks fundamentally different in a world with less defined perimeters, which likely drives greater demand for cloud-based solutions that protect devices/endpoints, people, applications and traffic. We think monitoring solutions will also be used to a greater extent to ensure applications are running as expected regardless of where the app is running or where the user is physically located. We also think additional layers of automation will be used as organizations increasingly leverage machines for additional processing capacity. Cybersecurity will become increasing important in the post-Covid landscape.

 

3. Capital Allocation – Given the painful impact of a global pandemic, we do not believe governments or corporates will ignore the prescient warnings given historically. We see obvious implications across the healthcare sectors, but also the need for corporates to invest in their existing infrastructure, supply chains and logistics to cope better in future. We see a world with less globalization, and rather greater local sourcing.

 

4. Shareholder Demands – We think investors will inevitably change their long-term views and equity risk premiums attached to various sectors. Government engagement, emergency actions will always be on the horizon, whilst prior defensive sectors have proved less defensive against pandemics than recessions. We envisage balance sheets being strengthened with implications for shareholder returns. We also see a strong case on environmental friendliness of companies and how they demonstrate themselves in generating a measurable environmental and social impact alongside financial returns.

 

With the economy entering a period of normalization supported by low interest rates and ample fiscal stimulus, stocks continue to offer superior return potential versus fixed income. Our forecasts look for mid-single to potentially low-double digit returns from stocks over the year ahead versus low single-digit or potentially negative returns from bonds. Moreover, extremely low bond yields mean that fixed-  income markets may not provide as much protection against stock declines as they have in recent decades. In our opinion, traditional views on optimal asset mix should be reconsidered to reflect the impact of structural change in the global economy on returns, correlations and risk mitigation within the universe of investment options. For many, one option may be to invest over longer time horizons and add more equities to portfolios. Supporting our positive view on stocks is long-term price momentum, which suggests equities could be in a long lasting bull market. We continue to position our portfolios with an overweight in stocks and underweight in fixed income.

 

The economic recovery has been exceeding expectations, vaccine developments are promising and markets have responded positively to the outcome of the U.S. presidential election. Although the economy may encounter hurdles in the very near term, our growth forecasts for 2021 remains modestly positive.