Assets that held up in the opening six months of 2020 – such as tech stocks and gold – are likely to continue to perform well in the latter half of the year, according to the BNY Mellon Real Return team.
However, Suzanne Hutchins – who heads up the £5.5bn absolute return fund with Aron Pataki and Andy Warwick – said investors should not overlook some of the areas that have tanked over the coronavirus crisis so far.
The first six months of the year have seen volatility in global equities spike to the levels last witnessed in the global financial crisis, after investors fled risk assets as the pandemic spread only to flock back to them in the wake of massive stimulus from policymakers.
Three-month rolling volatility of global equities
Source: FE Analytics
In the BNY Mellon Real Return team’s macro outlook for the second half of 2020, Hutchins said: “We expect the second half of the year to bring new waves of volatility, as markets and economies continue to be closely influenced by the news flow around Covid-19 for the foreseeable future; state intervention should also continue to play a vital role in supporting economies around the world.
“However, the array of fiscal and monetary stimulus deployed by governments and central banks globally has undoubtedly helped to underpin risk assets. At the same time, investors have started to look forward to some economic normalisation as we begin to exit lockdown measures, with the data from a number of Asian and Australasian countries (albeit despite recent news of localised lockdowns in Melbourne) providing grounds for optimism that this can be achieved without a meaningful increase in infection levels.”
The manager added that “if what we have seen in the first half of this year is anything to go by”, then it would be reasonable to expect the coming six months to bring even more large-scale monetary and fiscal stimulus from governments around the world. “Under times of stress, government intervention becomes fundamental to economies,” she explained.
Hutchins described the commitment of central banks to buying up government debt and governments’ efforts to support household and corporate incomes as “necessary” given the severity of the coronavirus crisis. But she warned that this could ultimately be creating inflationary pressures, which investors have largely been able to ignore in recent years.
“Beyond the near-term impacts, if new monetary policies create a path to inflation, investors could face a very different outlook to that which they have experienced over the last three decades,” she added.
In the political arena, the BNY Mellon Real Return team said that the momentum of global politics appears to have “remained on track” despite the coronavirus lockdown and moves to re-emerge from it. The US presidential election seems to be progressing as planned while the UK is continuing with the Brexit negotiations.
“Investors should continue to consider US politics as markets could be affected by the shift in polls for the US election,” the manager said. “Historically, US elections have exaggerated and extended price volatility, and we expect this election year to be no different. In the UK, Brexit may cause the economy to stutter further at a time when it is already fragile.”
So what implications does this macro outlook of continued volatility, more fiscal and monetary stimulus, and political risk mean for investors over the second half of 2020?
Performance of indices over 2020
Source: FE Analytics
“We expect Covid-19 will continue to affect markets as we head into the second half of the year. For this reason, in the near-to-medium term, we believe investors should focus on those sectors that are less susceptible to lockdown measures and the vagaries of the economic cycle,” Hutchins said.
She highlighted the so-called FAANGs – or Facebook, Amazon, Apple, Netflix and Google parent Alphabet – as five companies that have had “a remarkably ‘good crisis”. By the end of May 2020, these five technology stocks were worth more than the entire FTSE 100 index.
These companies led the decade-long bull market that followed the global financial crisis and then continued to outperform over both the sell-off and rally phases of the coronavirus crisis.
“These companies are typically cash-rich, so face no balance-sheet problems, and the nature of their businesses has actually seen them gain market share from more traditional business models,” Hutchins said. “As such, they have not only weathered the storm relatively well, but also been in the vanguard of the subsequent rally.”
In addition, the manager expects pharmaceuticals stocks to continue to perform well as investors back them to tackle coronavirus and other illnesses. However, she recommended that investors tilt their focus towards the higher-quality drug makers that are “spearheading innovation”.
But while tech and healthcare have led the market in the coronavirus crisis, areas such as hospitality and travel have tanked as widespread lockdowns dried up their revenues. That said, the BNY Mellon Real Return team thinks that selective opportunities could be created for investors.
“While the share prices of the more cyclical areas of the economy such as airlines, hotels and restaurants have been more depressed because of the direct impact of the lockdown, there is likely to be some ‘catch-up’ as the market rotates into these out-of-favour names as the economy recovers,” she finished.
“We would tread carefully and seek to invest only in those that we deem likely to be survivors of the post-Covid crisis world, and those that exhibit strong fundamentals and financial strength.”
The £5.5bn BNY Mellon Real Return fund is the third largest member of the IA Targeted Absolute Return fund and has established a strong long-term track record. Over the past 15 years, it has made a total return of 121.70 per cent – which is the highest of the eight absolute return funds with a track record this long.
Performance of fund vs sector and benchmark in 2020
Source: FE Analytics
Over 2020 so far, the fund has made a loss of 0.41 per cent. Although it fell harder than its average peer during the coronavirus sell-off, it is beating the average IA Targeted Absolute Return fund over the full year-to-date.
BNY Mellon Real Return has an ongoing charges figure (OCF) of 0.80 per cent and is yielding 2.22 per cent.