Roadmap to recovery

We recommend investors look through near-term uncertainty

Last month, we wrote that we expect markets to experience heightened volatility, notably around the US election, but that investors should use this time to position for higher stock prices over the medium term. We think this is still the right view to hold and plan to pursue. Although a recovery remains on track in China, US politics and the increase in COVID-19 cases in Europe have reduced the visibility around the economic and asset market outlook.

Some investors may be tempted to wait for more certainty before committing capital. But our view remains that it’s better to look beyond the near-term uncertainty and start to build long-term positions now. Whatever the outcome of the US election, we think new stimulus will roll out aft er the vote and lift economic growth. Successful Phase 3 vaccine trials, or the approval of an effective treatment for COVID-19, would also improve visibility on the medium-term outlook. And with central banks around the world telling us that interest rates will remain close to zero for the foreseeable future, being invested is the only option for those who want to protect and grow real wealth over the long term.

Despite our conviction about rising asset prices, we recognize many investors can’t ignore volatility. Downside risks make it more important to invest in a manner that is disciplined and diversified in the context of a robust financial plan. Investors should also remember that volatility can also create opportunities—to implement tactical positions, to improve portfolio yields, or to invest gradually at a deliberate pace.

Overall, we like equities, particularly the more cyclical parts of the market that we think have scope to drive the next leg of the rally. These areas include the UK, US mid-caps, and small- and mid-caps in the Eurozone. Heightened levels of volatility and skew in options markets are creating a window to reduce the cost of upside exposure to Eurozone equities. We also still see attractive opportunities in the credit space for yield-seekers.

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