Readers will remember how they felt and what they did after listening to Leo Varadkar’s seminal speech on St Patricks Day. Most will have called a loved one and bought the household essentials. The savvy amongst us however would have called our broker and bought equities, for the market bottomed a day or two later and has been on a historical run since. Despite ongoing and resurfacing domestic difficulties surrounding Covid-19 there remain global opportunities for investors to take advantage of. This year has been a consistent reminder to not lose sight of this fact.
The industrial recovery in China continues unabated. Evidence of this can be seen in the exceptionally strong price of industrial commodities, especially copper. On a recent webinar with the new CEO of Rio Tinto we were struck by his comments into how strong the recovery in China is, noting how they “couldn’t have predicted a better outcome,” and were “surprised demand could be so strong”. Even more importantly it is not just the public sector in China, driven by infrastructure spending which is booming. Private sector spending has also rebounded strongly. This is across numerous sectors and has been confirmed through recent comments by Daimler and Volkswagen, as well as luxury goods maker Prada.
The acceleration of the shift to a more digital world has naturally benefitted the bellwether technology names as the services and infrastructure they provide form the platform on which society and the economy operate. As these companies make up a large proportion of the stock market, their continued strong performance drives the overall market. Microsoft sales are currently $150bn which will grow 15% a year for at least the next 3 years in spite of trade wars and Covid-19. Its cloud business, Azure, which did not exist 5 years ago, will generate $20bn of revenue this year.
The benefits of this digital shift are felt across numerous industries. Nike is at all-time highs, reporting online sales rising 83%. An online sale for Nike is worth twice a traditional bricks and mortar sale to them. This acceleration of online retail business (5 years’ worth of demand brought forward according to Paypal) is driving demand for logistics and delivery companies which in turn are driving investment in factory automation and digital platforms of their own. Low rates and global fiscal spend by governments is driving investment into these industries which will dominate the next decade.
Closer to home there has been untold disruption to certain sectors, especially SMEs in the leisure travel and hospitality areas. However even allowing for this, some of the statistics coming out about the housing market in Ireland are extremely positive. At the current run rate, house price inflation could barely be negative on the year and approvals for first-time buyer mortgages is up over 10% year on year. Given the already well documented supply issues, this should provide a base for accelerated construction into 2021 to help drive the economic recovery.
As we enter the final quarter of a difficult year all the ingredients are there for the equity markets to produce strong returns over the next few years for investors. Rates will remain at zero and fiscal stimulus across the globe continues (regardless of the outcome of the US election).The market leaders of the last few years at the forefront of both this and the next leg in industrial and technological change have seen their outlook improve as a result of Covid-19. Ambitious carbon neutral targets by Europe are becoming the norm and will see the need for large scale investments across the global industrial supply chain. The more cyclical sectors of the market which have suffered this year are at attractive valuations, just as the global economic cycle picks up.
Merrion Investment Managers has a tried and trusted investment process with a proven track record that enables us to both exploit the opportunities and navigate the risks that lie ahead. This process has allowed us to not let the current domestic difficulties overshadow or distract us from the exciting global opportunities out there in which we can invest. The MIM multi asset funds’ exposure to growth assets is approaching the upper end of their asset allocation range.
Philip Byrne is Deputy Chief Investment Officer, Head of Equity Investments at Merrion Investment Managers, a division of Cantor Fitzgerald Ireland.
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