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Market Comment May 2020 - We take seconds of FAANG, Hold the GRANOLA for now!

After a monumental melt-down in mid-March, financial markets have started to rebound strongly in April. News surrounding equity markets have been positive this month. Looking at equity markets via their broad indexes, however, misses an important aspect of what has been happening beneath the surface. It is mainly one sector alone, US tech stock, which is performing very well while value stocks overall but especially in Europe languish. Why is that so? In times of crisis past, investors preferred security and that led them to go for quality and blue-chip equities. With the slumbering level of sovereign bond yields and crestfallen commodity prices, there would be no other place to go to in the coronavirus crisis. However, emergency measures that shut down economies and flooded the financial system with money leaves investors facing a shortage of quality companies and those that are generating robust revenues. The activist role of central banks has certainly prompted a sharp recovery in broad equity markets. The focus on just one sector suggests that expectations of an economic recovery that lifts cyclical sectors are not in place, only that central banks have placed a floor under asset prices. Global markets have become increasingly dominated by slow-growing companies in recent years, and that there is a smaller proportion of fast-growing companies. Over in Europe and away from the US FANGs club of big tech, Goldman Sachs, an investment bank, identify the “Granolas”, a group of companies with “relatively strong balance sheets, low volatility growth and good dividend yields, around 2 per cent-2.5 per cent”. They include a mix of healthcare, consumer staples and tech: GlaxoSmithKline, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP and Sanofi. Still, these stocks receive barely any attention now. It will certainly require evidence of a V-shaped economic recovery to ignite demand for cyclical and value stocks. The signal here is an appreciable rise out of negative territory for real yields, which in the past has triggered a rotation from growth towards stocks that are more geared towards a better tone in the underlying economy. That may well arrive some day and spur another big value trade at the relative expense of growth. But at this moment, investors are not really buying the end of equity market leadership from technology companies, particularly when they are benefiting from an acceleration in digital trends from the pandemic, such as working from home, greater use of cloud services, and online shopping among others, The backdrop of likely low bond yields and economic growth continues to make companies that do show growth more attractive. We do not think this has changed. That leaves US tech stocks topping our list of long-term winners. Please drop us a line or pick up the telephone if you would like to discuss how to invest in the current market, we would love to hear from you!

Switzerland, May 1st, 2020


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