Tech-fuelled lifestyle changes, supply chain shifts and China – what to look for as we emerge from COVID-19 haze
Innovation drives markets and will lead the post-pandemic recovery, according to a leading equity strategist.
Stephen Dover, Franklin Templeton’s head of equities, said massive fiscal and monetary stimulus is insulating many sectors and businesses from typical recessionary wounds like insolvencies and defaults.
He said that explains, in part, why the markets are performing so well compared to the economy. The second main reason, he added, is that many firms – particularly hi-tech ones – were already leaders in trends that have since been accelerated by the COVID-19 crisis. These are the main growth drivers of the S&P 500 and, whether they are providing technology that allows us to work from home or order in food, the firms behind our current work-life situation are booming.
And while the virus will ultimately dictate when we can go back to the office, people will also have lifestyle choices to make. Do we prefer working from home? Do we prefer to shop online? Do we prefer to eat in rather than go to restaurants?
Dover said: “There are a lot of changes that are heavily influenced by the situation we're in but there are actually lifestyle changes that will go forward with us and those industries are innovative and are going to help us [recover]. Technology enables innovation but all industries everywhere are trying to find innovative ways to change.”
Another huge shift is occurring in the industry supply chain. Dover believes more and more production will come back to developed countries and is bullish about the Midwest of United States’ prospects, for example. Health factors around the coronavirus, trade tariffs and the diminishing of labour costs between China and developed markets will see a potentially “huge structural change in the economy over the course of the next few years”.
He added: “It's well known that the United States is a consumer economy and I think that will keep going, but I think we're going to turn a little bit back to how it was in the 60s and 70s, and have a more industrial economy, with more capital spending. As we start to move our supply chains back to the United States, I think that'll happen in Europe and other places as well.”
Conversely, he expects China to continue to increase its consumer-driven portion and that, moving forward, global investors will be remiss to overlook the Far East superpower. The country is returning to work in a way that’s probably ahead of most countries and there is a vast amount of local stimulus in the market.
While urging caution with the China market – it’s a little “ahead of itself” and issues remain with the U.S. – Dover said that practical matters will win out over the long term.
He said: “About 10 years ago, the United States stock market represented about 40% of the global stock market. Now it's approaching 60%. Can the U.S. continue to dominate the outperformance versus the rest of the world? I don't think so.
“So, it would be a mistake to continue to have so much your investments in the United States and I would strongly encourage more diversification globally. There are opportunities in emerging markets - some are doing better, some are doing worse – and, if you look at Europe, I'm very encouraged that the virus seems to not be spreading quite as rapidly, which means the economies are going to come back.”
