The Broad View
Investors who rode out the 2020 market turmoil know the value of standing firm in the face of adversity. A brutal recession and bear market were followed by the fastest rebound in history, with U.S. equity markets hitting new record highs throughout the fourth quarter and into 2021.
Should investors expect more volatility amid the ongoing pandemic this year? What are the key investments themes that may play out? Will U.S. stocks outpace international markets again?
Rob Lovelace, a Capital Group portfolio manager, addresses these questions and more in a wide-ranging Q&A interview:
I use a three-part framework that focuses on COVID-19 and the public health issue as separate and distinct from the economy, and separate and distinct from the capital markets. There's obviously some degree of linkage, but people assume there should be a direct cause-and-effect relationship and that’s not necessarily the case.
Starting with the health issue, we’re going through a very difficult time in many countries right now, but we have the hope of the vaccine rollout. So even though I think we'll continue to have flare-ups in different regions, we should be able to deal with them more effectively and they will have a diminishing impact on the economy.
In terms of stock markets, we hit the bottom last spring and are now seeing signs of recovery everywhere. The U.S. and Europe have done relatively well, and emerging markets have been very strong, driven by China, where we are seeing not just a solid economic recovery but sustained growth going forward.
It’s been a unique market cycle. We had one of the fastest declines in history followed by one of the fastest recoveries in history. There’s never been anything like it before. At the beginning of last year, if we told people what would happen, relative to COVID and relative to the economy, no one would have believed U.S. stocks would be up 18% by the end of the year and nearly every market around the world would be in positive territory.
The reason we're seeing that broad-based strength is because there was a coordinated global effort to support markets and stimulate the economy. A lot of that stimulus has found its way into the capital markets, both stocks and bonds, and that’s a big part of the reason for the recovery we’re seeing now. Low interest rates and massive stimulus efforts — that’s the key framework, and that’s why I feel fairly optimistic going forward, especially from an economic point of view.
The other piece is the great acceleration in many trends that were already in place before the pandemic. We’ve seen years of development and change happen in months — whether that’s new ways of working or the digitization of everyday life.
I think we’re definitely at the stage where we are climbing out of the valley. That doesn’t mean it will be a smooth climb. We may still have some strong headwinds, especially on the health issue until more people are vaccinated. But by late 2021, in my view, we’ll be in the midst of a sustained recovery across the board.
The markets may be a slightly different story since they’ve already anticipated the benefits of the vaccine and the recovery. So this is a time to be really selective in terms of individual companies. I expect some volatility, maybe substantial volatility. And there will be some disappointments for sure. But you’ll want to stay invested because, as we are seeing in China right now, we are expecting a period of real sustained economic growth, building on the rewiring of the economy that we’ve seen with the rapid growth of digitally focused companies.
It certainly was an extraordinary decade. The U.S. benefited greatly from a period of incredible technology and health care innovation, and I expect many of those companies to continue doing well. But we are seeing a definite shift toward a more global benefit pattern. There are great companies all over the world capitalizing on these same dynamics.
In fact, there’s a lot more innovation outside the U.S. than you might think. If you look at digital payment volumes, for instance, you can see there's actually more activity outside the U.S. So the same pattern that has driven the U.S. market for the past decade is becoming more global. That’s why it’s so tricky to talk about U.S. versus non-U.S. We don’t think about it that way because it’s a global framework. We search for the best companies in the world, no matter where they are based.
I’m focusing on pent-up demand. I think that's going to be a big theme offering a lot of compelling short-term opportunities — one of which is luxury goods. We’re seeing solid demand for Louis Vuitton bags and other luxury items right now. A lot of that demand is coming from China because, as I mentioned earlier, the Chinese economy has already recovered.
But there's also something else going on that we hear about when we talk to the distillers and the beverage companies. When given a choice, people are buying top-shelf liquor. I think the sentiment is, “We’re all going through this very tough period, so if I’m going to buy whiskey it’s going to be the best whiskey.” We’re seeing a lot of consumer-facing companies with surprisingly strong demand. And, of course, just about anything that touches the digital world is doing well. So those are a couple of themes that I think will remain relevant for investors this year and beyond.
That’s not a hypothetical question for me. In the portfolios that I manage, my average holding period is about eight years, so I’m living that approach to investing. Clearly some things have fundamentally changed. We will have hybrid work and meeting structures, which in some ways are better than having everyone fly in for a big conference. There will be a lot more digital interaction.
But I think we've also come to appreciate that human contact matters. We want to see each other in person so we can brainstorm and build off each other's thinking. So I think we'll see a world in which business travel comes back and we'll have a lot of interaction again, but I think it's going to be more intentional and thought out than in the past.
We’re all much more comfortable now in a digital world. Countries like India are getting rid of physical currency — they're adopting digital payments, and there will be less resistance to it because we’ve all become used to a world where paying in cash isn’t necessarily the best way to go. There’s just a different mentality today.
We may also see a shift from larger cities in North America and Europe toward smaller cities due to the expansion of digital connectivity. We're looking at those shifts and thinking about how they're going to impact our portfolios. I think the ubiquity of high-speed connectivity will be a game changer over the next 10 years.
Stay focused on the long term, stay invested and stay open to global opportunities. The U.S. is very well positioned as an economy. We have a lot of great companies here. But if you've done nothing over the last few years because U.S. stocks have been compounding at roughly 15% and the rest of the world at 7% or less, you probably have a lot more of your assets invested in the U.S. than you do elsewhere around the world.
Even if you're investing in multinational companies, you may have a lot more exposure here than you wanted when you originally set up a diversified portfolio. So look at global opportunities as much as you can, find the best companies wherever they happen to be based and make sure you have good investment partners that are able to swiftly adapt to a changing environment.