How should investors play the recovery?

3rd November, 2020

The pandemic lends itself to gloom. As cases rise again, policymakers are faced with the uncomfortable choice between human life and economic meltdown with all its associated consequences. However, there is another, more optimistic scenario, one where a vaccine frees us from lockdown, social distancing and other restrictions and life resume again.

If this happens, investors could reasonably expect a dramatic economic recovery. Fiscal and monetary stimulus has put plenty of money in the system; people need the confidence to spend it. Given recent progress on a vaccine, this scenario is plausible and should be part of an investor’s portfolio planning.

In a normal economic recovery, the sectors likely to benefit would be the usual economically sensitive areas such as energy, mining and airlines. In today’s environment, these sectors are all extremely cheap, which would add to their appeal should recovery become more likely.

However, there is a real question over whether this recovery will see the economy return to business as usual or whether it will return to a new normal. This new normal would see working and living patterns change. In this scenario, areas such as travel or commercial property might still look vulnerable. As the experience of companies such as Debenhams has shown, the shares aren’t cheap if the company is going bust.

There is also the problem that even if these areas recover in the short-term, their long-term growth prospects are relatively unexciting. Shouldn’t investors with a 10-20 year time horizon be looking for areas of structural growth rather than trying to trade around short-term movements? But that brings in the problem of price: the most obvious structural growth areas are expensive.

The reality is that it is not one or the other: investors have been somewhat one-track in their pursuit of structural growth, which has led them to a narrow focus on a handful of large global technology companies. There are areas of structural growth that have been overlooked by investors – parts of the UK market, for example, European companies or niche markets such as frontiers.

This might be a better starting point for investors looking to play the recovery than delving into the murkier parts of the market, which may or may not benefit from rising economic growth.

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