Webinar: What comes after the volatility of 2020?

Positioning for a cyclical recovery….

 “2020 was a year of winners and losers” says Investment Director Ahmet Feridun. Some sectors, such as technology, benefited from our new stay-at-home lifestyles and saw share prices soar. The opposite was true for those industries more adversely impacted by lockdowns, such as airlines and energy. The sharp divergence in performance has been called a “K-shaped“ recovery.  

Looking ahead, there is widespread belief among investors that this recovery will broaden out, fuelled by vaccine roll-out and reduced political uncertainty following the Brexit trade deal and US election. We “share the view that there is still a short- to medium-term opportunity in more cyclical assets,” suggests Ahmet. “We have been adding to these areas. Despite improved performance over the last few months, there remains a large performance gap between industries most affected by lockdowns and those which have benefited”.

Joe Biden’s presidency could add to the momentum: “Biden’s first focus is likely to be getting the economy back on track, including a larger stimulus package,” says Ahmet.   

….while sticking with defensives and longer-term structural themes

There are still significant risks on the horizon, and we are maintaining our holdings in more defensive assets – such as gold, government bonds and cash.  In particular, there is still a high degree of uncertainty relating to Covid-19. “Some countries are lagging behind in the vaccine roll-out,” suggests Ahmet, with France and Germany significantly trailing the UK and US. There is also the risk that new strains of the virus will prove resistant to current vaccines.  

Last year, our portfolios benefited from exposure to long-term structural trends, such as technological innovation, rising healthcare spending and sustainability. “The pandemic accelerated many of these themes,” says Ahmet, “and we maintain our conviction in them.”  In fact, last year’s performance in some of these areas– such as technology and renewable energy – was so strong that it has left valuations “looking stretched.” In these cases, “the market is likely to start distinguishing between true winners and those that benefited through association with popular themes. For this reason, we are tending to favour more targeted, active managers.”

The rise of Generation Z….

Our equity specialists discussed a key demographic shift that we think will have an important bearing on investment markets in the years ahead.  

Those born between 1995 and 2016 – “Gen Z” - now account for 32% of the world’s population. India currently has the largest number of people in this age category, with more than the US and China combined.  

As this generation enters the workforce, its income is set to soar, reaching $70 trillion by 2040, explains Portfolio Director Graham Harrington, citing a report from Euromonitor.  Gen Z “has never known life without Google,” points out Graham, "and this will have a huge bearing on how it spends its time." The World Health Organisation estimates that members of Gen Z “will spend nearly six years of their lives on social media – more time than they spend eating, studying and socialising combined.”         

…and some stocks we think could benefit.

“The epicentre of this demographic shift is India” says Portfolio Director Dominic Liversedge. With improving educational standards, we expect to see “improving earnings and living standards as this educated cohort moves through the economy.” There will be some long-term beneficiaries in the Indian equity market – such as HDFC Bank. It is the second-largest mortgage bank in India – and the largest digital bank. “They have been investing heavily in technology over the last decade, have a very efficient platform and a very high margin” explains Dominic. We also think the Indian mortgage market is a great long-term opportunity. “India’s mortgage-to-GDP ratio is still only 10%…the figure is closer to 20% in many other emerging markets. With the government focused on creating more affordable housing, we think mortgage demand should continue to grow.”

Video streaming has received a huge boost from lockdowns, “but it’s also a structural growth story as younger viewers move away from television.” YouTube, Netflix and Disney are key beneficiaries. We think YouTube and its owner Alphabet look particularly interesting. “YouTube currently accounts for just 2% of total advertising spend, with 35% still going to television,” explains Dominic.  “If YouTube can reach even 5 – 10% of advertising spend, there is still a huge opportunity for Alphabet.“

Nike is another company set to gain from the rise of Gen Z. It taps into two big themes – the growing popularity of “athleisure” wear and Gen Z’s passion for recycling. Nike started a “Reuse-a-Shoe” programme in 1993, when it used old shoes to resurface basketball courts and running tracks. Its technology has come a long way since then and it can now make trainers entirely out of recycled shoes.  

The securities referred to in this article are for illustrative purposes and are not to be considered a recommendation to buy or sell. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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