Romain Boscher of Fidelity expects a sharp divergence in stock market performance during the recovery phase, with financial health as the decisive factor.
‘Earnings expectations continue to deteriorate rapidly, and we are now expecting a decline of at least 20% in the most favourable scenario, with a potential decline of 30-40% in the least favourable assumptions,’ says Boscher, Global CIO Equities at Fidelity International.
In an economy that’s being kept afloat by the printing press, underlying inflationary pressures are already emerging in consumer goods, a development that will initially be masked by the collapse of oil prices, Boscher adds.
Financial repression
In this context, however, not all sectors are in the same boat. While some, such as healthcare or technology, are expected to be little affected and will quickly return to pre-crisis levels, others such as commodities will face a much deeper structural crisis.
Public debt will explode to historically high levels. In this context, the future environment is likely to be even more difficult for investors, with low interest rates that will continue to financially repress savers, with bond yields that will remain low and dividends and share buyback programmes under threat.
Balance sheet strength
The list of companies at risk of permanent damage is now long, as shown by the explosion in credit spreads. More than a third of issuers are now under threat of a downgrade to the high-yield segment. ‘The first question we ask at every management meeting is how many months they will be able to survive without the need for refinancing or government intervention. Today it is the strength of balance sheets that makes the difference, more than the value or growth of a company’, says Boscher. ‘And in this context, stock picking will be key more than ever. To take advantage of the rebound that will come, companies will have to survive the downturn first.’
Preference for EM
Boscher notes investors did not panic during bouts of extreme market volatility. ‘The real risk today is that the economic reality of the situation will kick in, with a rise of state intervention in the economy and less attention being paid to profitability and shareholder remuneration. Shareholders may have to wait to reap the benefits of their investments.’ Boscher doesn’t expect indices to return to their pre-crisis highs before 2021.
Geographically, he notes that emerging markets are currently in a more favourable position, particularly Asian markets which are benefiting from a faster exit from the crisis, a stabilisation of their currencies and lower costs for their oil supplies.
Sustainability
Technology and healthcare stocks should remain attractive, as these stocks are affected relatively little by the crisis. ‘Overall, we prefer stocks whose results will be protected, such as Roche or Ericsson. We increased our allocation to these stocks when they corrected by 20 or 30% during the market downturn.’
Boscher also stresses that this ‘new normal’ is beneficial for stocks with good sustainability profiles. ‘It is going to become more essential than ever in the current circumstances. Poorly rated segments such as fossil fuels are now struggling to absorb the shock of containment and falling consumption, while sustainable producers are far better off.’