Overview
- This conversation was recorded on the morning of 11th June
Key quotes
On market conditions
“We’ve previously spoken a lot about healing and the process of how that would play out when underlying market dynamics showed signs of recovery. But the speed and size of [market] moves have been impressive.”
“I give great credit to my colleague Steve Ellis, as he had discussed how markets would almost ignore the economic data and just look at the wealth of the intervention, and the degree to which liquidity would drive markets.”
“The liquidity build up and risk-taking - the almost relentless nature of it - has been a surprising element, but we remain cautious as to how this [crisis] plays out in the real economy.”
And the nature of the rally
“We have gone from seeing a recovery in the high quality, resilient companies, through to the cyclical and more reflation-orientated securities as belief in the recovery started to grow. And it was very interesting to see the recent return of performance in value.”
“But now we’ve gone into the trash phase, into the zombies’ conversation of everything being supported. If it is, then you are seeing the buying up of anything that looks remarkably cheap and marked down. And I think that’s a worrying signal that the market is over-extended.”
On remaining cautious
“It’s important to think about what the key influences will be as we look forward. Although some recovery was likely on the back of intervention by authorities, it has gone much further than we expected.”
“When you look at underlying market dynamics now, I admit I am even more cautious. We are at the point where if you had put a few more cards on the table and won a few more chips, I’d be taking those chips away and seeing how it plays out from here.”
On the potential impact of the US election
“The policy shift that could occur if the Democrats were able to secure Congress, the Senate, and the Presidency, would be enormous in terms of the thought process in US policy. Any tax policy unwind could play back into unwinding some of the tailwinds the corporate world has had, though they (the Democrats) will continue to provide other forms of economic support.”
“The markets have done very well, but Mr Trump’s standing has not improved. And that is an interesting disconnect, because normally these are pretty close, even if there is a lag. Maybe there is a little bit of that to come, but the markets will start to tell us in the last 8-10 weeks (before the election) just how nervous they are.”
On Europe looking better
“The European moves of recent days - the German move (€130bn in fiscal stimulus) and the steps towards debt mutualisation - are very encouraging. If you look to Europe as an area to do better, there is a value linkage in terms of companies and how we look at investing into Europe versus other areas.”
“We are used to Europe disappointing expectations, but they’ve actually been over-delivering very recently, which is encouraging. The challenge is that there is still a lot of uncertainty around how lockdowns wind down and activity picks up.”
On where to focus
“Our portfolio managers and analysts are very focused on the quality of companies and the reality of what is happening for them individually and how they are responding. By focusing on the underlying dynamics of the companies in which we invest, we should be able to navigate effectively.”
