Q3 2020: Investment Outlook

Key Takeaways

• After a sharp decline in the first quarter, China’s economy has begun to recover. We believe a slow and extended U.S. recovery is beginning.
• Because the stock market has priced in a sharp recovery that is yet to show up in the data, we believe caution is warranted.
• In this unsettled environment, we believe making active decisions with a focus on higher-quality companies can help narrow the range of potential outcomes.
• Despite a sharp rise in companies cutting or suspending their dividend payouts, we think historical long-term performance data demonstrates the value of owning dividend payers.
• We believe companies whose products or services make it easier to work, shop, learn, eat and play at home will have advantages over traditional offerings for some time.
• Regardless of which direction the investing style pendulum swings, we believe investors should maintain exposure to traditional growth sectors to participate in transformational advances in health care and technology.
• We are monitoring the U.S.-China relationship, which is at risk of boiling over and reemerging as a source of volatility as the U.S. election season ramps up.
• Our outlook for U.S. Treasuries, U.S. Treasury Inflation-Protected Securities (TIPS) and European sovereigns is positive, while our view of U.S high-yield and European credit is negative.

Investing in the Time of Coronavirus

COVID-19 has introduced an economic experience that few could imagine. We’ve averaged one recession every 10 years since the 1970s, so most of us are familiar with how they should play out. Economic or financial market issues usually tip us into recession, and central banks and governments pull levers to help get the economy back on track. This recession is different.

Unparalleled Uncertainty

Investors often declare “It’s different this time” as they downplay market excesses destined to end badly. But this time IS different. COVID-19 is driving an extremely rare, exogenous event that won’t end until a medical solution complements various monetary and fiscal measures. The timeline is unclear with a range of potential outcomes.   ​

With billions of people affected and trillions of dollars in economic losses, this recession could likely represent the most severe economic event of our lifetimes. Against this backdrop, we share a common task with you—making long-term investment decisions based on imperfect information about the pandemic’s resolution. 

Quality and Sustainability Come to the Fore

In this unsettled environment, we believe it’s important to make active investment decisions that help narrow the range of potential outcomes. Therefore, we’re emphasizing quality across all asset classes. It’s an overused term, but we define quality as high financial productivity coupled with stability and financial strength. A company’s ability to sustain its results without the benefit of a strong economy also factors into our analysis. Examples from our portfolios include:

• Among investment-grade corporate bonds, we favor less economically sensitive sectors with strong cash flows and fundamentals, including cable and telecommunications. In high yield, we see value in the home builder and health care sectors but are avoiding travel-, leisure- and commodity-related companies.
• Our Global Value teams have always focused on quality. In health care, they own high-quality pharmaceutical companies and have added to positions in select medical device companies that underperformed during the March sell-off. Despite the financial sector’s struggles broadly, they also see opportunities among trust banks.
• Our Global Growth teams continue to find companies that can sustain performance tied to long-term growth themes and trends the pandemic helped accelerate. For example, work-from-home practices have fueled extra demand for digitalization, cloud computing, the 5G network buildout and data center expansion.

Looking Ahead

Surrounded by uncertainties, our investment teams are navigating a cloudy environment. In this issue of Investment Outlook, we share observations about what they’ve learned so far and discuss risks and opportunities as the world economy begins to reopen. In the meantime, we think you should evaluate whether your portfolio still aligns with your goals and risk tolerance.

Thank you for investing with us.