Uncertainty. It may be the word that best describes the global landscape as 2020 draws to its painful close. But it’s also a concept investors can use to explore opportunities in the months ahead.
John Reynolds, EVP and portfolio manager, Templeton Global Equity Group (part of Franklin Templeton Investments Corp.) in London, noted that while uncertainty remains on several fronts — Brexit, the U.S. political context, the impact of Covid-19 — a period of greater stability may be on the horizon.
“When you have more certainty, you have a more favourable backdrop for equity investing,” he said.
Like Reynolds, Martin Fahey, senior vice-president and head of the Mackenzie Investments Europe Team in Dublin, was cautiously optimistic.
While some of the economic impacts of Covid-19 restrictions are likely to linger, he noted, the prospect of widespread protection from vaccines is likely to improve the outlook for world economies.
“There has been a massive buildup of savings by consumers over the last nine months,” Fahey said. “[P]eople are desperate to spend money,” which points to a “reasonably strong consumer rebound.”
Fahey, who manages Mackenzie’s global small and mid-cap funds, foresees that rebound coming in the second and third quarters, bolstered by relaxed fiscal policies.
As for negative risk factors, Fahey said many countries will bring in tighter budgets, which are likely to be combined with higher taxes. He’s seen business owners preparing to sell their stakes in order to avoid hikes in capital gains taxes. “You are starting to see the investment implications of that already,” he said, with a large uptick in mergers and acquisitions.
Other trends likely to impact investing include rising commodity prices and a weaker U.S. dollar, Fahey said, which could create more favourable conditions for non-U.S. firms.
Investment opportunities
Reynolds noted that U.K. stocks are trading at discount compared with European equities, making some names attractive.
For example, Reynolds said U.K.-based new home builder Persimmon plc is “a very well-positioned business” that will continue to grow regardless of the Brexit outcome.
He’s also interested in building up positions in well-run “FTSE 250, FTSE 350-type companies that have more domestic concentrations than international exposure.”
Fahey warned, however, that this year’s home sales have been bolstered by a temporary suspension of land taxes that will end in March 2021.
Reynolds was cautiously optimistic about the trend toward electric vehicles, which was established before the recent disruptions. Reynolds said strict new European emissions guidelines could be a boon, especially for the small- and mid-cap firms that support related infrastructure, such as by constructing electric vehicle charging points or developing grid infrastructure software.
Reynolds advised caution around firms that have done well during periods of lockdown. Grocery companies, for example, may not be able to sustain their gains when restrictions are lifted.
Areas in Europe Reynolds would avoid include older companies that are likely to struggle due to structural shifts, such as conventional automakers. Banks may also have a difficult time.
“Energy companies have been slightly more attractive,” he said, “but face a reasonably big transition.” This creates opportunities to buy “safe” companies in the sector with strong balance sheets that are investing to become cleaner.
Brexit
Andrew Bailey, Governor of the Bank of England, warned in November that a no-deal Brexit would have greater negative economic fallout than Covid-19.
“I think he is right, for a number of reasons,” Fahey said. “Number one, it is going to result in a massive disruption to the supply chain.” He also expects a weaker pound sterling, which will drive up the costs of the U.K.’s many imports, including food. Add in what are expected to be major increases in unemployment, a soaring deficit, and the possible departure of many London-based financial services firms to other European nations, and the picture darkens.
“You put all those factors together, and a hard Brexit is going to be very negative for the U.K.,” Fahey said.
But the fallout, while significant, will pass, Reynolds noted. “I think we are at the beginning of the end of that process,” he said. “It has helped to unify Europe and that, in the longer term, will provide more certainty.”
Fahey agreed, noting that Europe’s emphasis on green industries will also support an economic recovery. “I think the outlook is much better than the news might suggest,” he said.
After failing to reach an agreement before the self-imposed deadline last weekend, British Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen extended discussions this week in an attempt to avoid a no-deal Brexit on Jan. 1.
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