My daughter was born this year and so was a new bull market. I’m excited about watching them both grow over the coming years. There will inevitably be times when they stumble as they establish themselves but the long-term outlook is now one of sustained growth.
I say that with confidence because the recession was clearly caused by the virus and so the announcement of highly effective vaccines, assuming they work as well as the initial results suggest, should mark the start of a sustainable multi-year period of economic recovery. Just as a new born child is fragile, so is a new born economic recovery, with many still struggling to get back on their feet.
But the vaccines will provide the catalyst to get things moving again and once economies get going they tend to benefit from a self-sustaining economic momentum. That’s because as consumer confidence starts to improve spending increases. This leads to higher revenues for companies, who in turn hire more staff to meet rising demand, leading to further increases in consumer confidence and spending.
This is why once unemployment starts to decline it then tends to decline steadily for many years. The vaccines will provide a shot of confidence that will kick-start a positive feedback loop once economic activity is allowed to resume.
Yes it will take time to roll out the vaccines and the logistical challenges are significant, particularly in some emerging economies, but none of that changes the fact that in two years the global economy will have grown stronger than it is now. In fact, it is precisely the weak starting pointing that gives me such optimism that there are many years of growth ahead. And while many are struggling now, markets are forward looking and the outlook is much brighter in a world with effective vaccines than it was when nobody could say with confidence whether there would ever be a vaccine.
So what am I buying in my daughter’s new Junior ISA? Frankly, the vaccines are good news for almost all equity markets. But with a long-term investment horizon, I’m looking for companies that can deliver long-term growth at a reasonable valuation. That draws me to the emerging markets with their rapidly growing middle classes, likely to drive rising consumption for many years to come.
Most of the countries in North Asia, like China, Taiwan and Korea have already got the virus under control. So the domestic economies are already recovering and the vaccines should lead to an acceleration in their exports too as developed world consumers starts to recover next year. What’s more, valuations appear reasonable. MSCI China, for example, trades on a PE ratio of 15 times next years’ expected earnings.
In the US, there are also stocks with a strong growth outlook but for some of those stocks valuations already reflect a lot of that growth potential. Therefore, in the US I am more attracted to those cyclical stocks which are exposed to the economic recovery but which trade at reasonable valuations and aren’t weighed down by excessive levels of debt accumulated during the recession. I’m also cautious to avoid those cheap stocks for whom the outlook may still be challenging even with vaccines. For example, companies which rely on a return to pre-Covid levels of business travel, which may, if ever, take a long time to fully recover now that video meetings have become more normal.
In Europe and Japan, the long term growth outlook for the domestic economies is weaker than in the US or the emerging economies. So there, a focus on smaller, faster growing companies with exposure to structural growth trends and the emerging markets seems to make sense, as well as those which are best placed to benefit from the snap back in economic activity post-Covid. As always, being careful not to overpay for that growth is important.
Which brings me home. UK stocks are well placed to benefit from an economic recovery if a Brexit deal can be done but could struggle without one. The mid and small cap stocks would be particularly vulnerable as they get more of their revenues from the UK and Europe than the FTSE 100, which gets 60% of its revenues from outside the UK and Europe. So I would add to large cap UK stocks and look to add in some smaller UK companies if we get a Brexit deal.
I don’t expect the next few years to be a completely smooth journey but I do expect them to be very rewarding as my daughter, the global economy and her portfolio grow. I think we’ll look back on 2020 as a challenging year but also the start of a new beginning.
Mike Bell is global market strategist at JP Morgan Asset Management
