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19 May, 2020

By Niall O’Sullivan, CIO International

As investors, we need to understand what is behind these apparent surges in value despite economic data still looking quite bleak, and think about what we have learned in previous crises – even if they do not look or sound like the current one.

 

A glance at some equity indexes might make you think global stock markets were back in rude health, but a closer look reveals something a bit more complex.

 

At Mercer, thanks to decades of advising investors, our dedicated research team has built up unrivalled knowledge of the relationship between capital markets and institutional holdings. By understanding what happens in markets and why, we are better informed to build client portfolios that aim to protect against losses and target opportunities.

 

I was recently invited to be a panellist with three other investors at the FT's live digital Global Boardroom and we took the opportunity to discuss how far equity markets had fallen and the outlook for what might come next.

 

Firstly, we dug into the detail to reveal what has been behind the apparent world equity market revival.

 

Eoin Murray, fellow panellist and international CIO at Federated Hermes, said the main upward drivers were big tech companies that account for roughly 20% of the S&P 500, with the healthcare sector making up a further 15%. Both these sectors have been – and look set to be in continued – high demand since lockdown began in March.

 

“If you take those out, you really have not seen the kind of recovery that everybody sees in the headlines,” said Eoin.

 

As I framed it on the call, the Equity markets seems to be suggesting that “the Strong companies will do as they can, and the weak companies will suffer as they must”. A more prudent way of assessing what has happened, therefore, is to look at the sectors that have been most heavily exposed to and affected by the pandemic – and those that might struggle anew when lockdown is eventually lifted.

 

For me, it is like trying a thought experiment and putting myself in the shoes of a CEO or boss whose company has been hit by the pandemic, and try to see the course of how they make it through the next stage.

 

There has been a great deal of government and central bank support to try and keep global economies afloat, but what happens next?

 

We discussed how equity markets could continue to be relatively stable or could also fall further, depending on a number of factors: government policy, the spread of the virus – and ultimately public confidence and activity.

 

Additionally, there may be companies that had made it through the crisis OK, but are unable to continue without the significant central bank support.

 

In a nutshell the discussion group felt the push of poor economic data and consumer shock was to an extent balanced by the monetary and fiscal actions and the ultimate re-opening of the economy.

 

However, people may be losing sight of other key risks from equity holdings. While the lungs of the planet have had a break through the crisis, investors with a Sustainability or ESG type focus will need to consider the implications of cheap fossil fuels from here. As I mentioned on the call, we are still seeing that like-minded investors are looking to be Future Makers with their capital allocations and that we are seeing keen interest from companies to join in these efforts.

 

Whether we get back to the February highs depends on a range of variables. It is likely there will be opportunities – but they crucially depend on the time-frame of the Investor.  That said the questions that mattered before still matter now! 


 

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