The macro picture_

. the global economy is getting out of the hole .

Markets have been concerned by a second wave of Covid-19 since summer. The number of cases has risen back to where it was in March in several places, including Spain and France while plateauing in the US. A key difference however is the fatality rate which has been contained by a better understanding of the virus. In effect, the risk of a return to widespread shutdowns is low.

After the engineered collapse of the global economy in the first half of the year, activity has rebounded more strongly than expected. In effect, most of the manufacturing indicators point to a V-shaped recovery, while services experience more diverse outlook. The data point to a trade recovery starting in Asia, its main engine, and centered around the electronic cycle.

Other parts of the economy should benefit from progress on a Covid-19 vaccine. Research efforts are unprecedented: the LSHTM vaccine tracker counts no less than 241 candidates currently developed, with 8 of them in the final phase III. The likelihood that one of them is approved by the US FDA before year-end is high in our view.

. policy push / policy put .

Another key factor contributing to the better-than-expected economic scenario is policy. Central banks and governments have deployed more in 6 months than the combined measures of 2008-09 and 2011-12. In particular, the taboo of explicit combination between monetary and fiscal policy has been broken. Governments can now count on central bank’s asset purchases to keep interest rates low and unlock extra borrowing.

The industrial sector in a V-shaped recovery

Global manufacturing PMI index*

*Includes the US, Eurozone, Japan, UK, Australia, Canada, Sweden, Switzerland - Source: Markit, SILEX, as of September 2020

Not only is policy supporting households and businesses in unprecedented ways, it is also giving out a free put option to investors by committing to do more in case things go wrong. It seems relevant to monetise this option by getting exposure to cyclical assets.

China pushing hard

China credit impulse

Source : Bloomberg, SILEX, septembre 2020 

The micro picture_

. winners will rise again .

Everyone loves a comeback story. Nothing is more fulfilling than watching the fallen hero that rises from total defeat and returns transformed: stronger, more focused, and more successful.

The changes that the last few months have brought about, along with the structural shifts in paradigm that are here to stay, have posed an immense challenge to most people and companies in the world. However, in any transcendental cyclical shifts, there are always sectors that suffer the most severely. The current pandemic has been particularly brutal for some industries like the travel, entertainment, consumer discretionary, and leisure industries. This undiscriminated negative impact will be an extinction event for several companies. However, it has also left the perfect environment for great investment opportunities if you can look deeper and identify the strong players fighting their way back.

Our Quality Cyclical thematic seeks to identify those struggling yet resilient companies fighting to come back. Companies that show a distinct set of qualities and competitive advantages that had made them stars before, and that we think will make them winners again.

The thematic portfolio identifies 25-35 quality stocks that provide investors with exposure to companies that can benefit in the short to medium term from changes in the economic cycle and business environment. Concretely, we focus on two quality indicators: rising ROE and resilient net debt / EBITDA.

We expect revenues and EBIT to go back to pre-covid levels by 2022. Equity markets should start to price a full recovery somewhere during 2021, or earlier when a viable vaccine is out.