Navigating the recovery

Navigating the recovery

Investors need to distinguish businesses that are likely to perform well as the world recovers from the virus from those that will struggle.


  • As the world economy recovers from the pandemic some things are likely to have changed forever, and we’ve identified three categories to help guide our investment decisions.
  • We like companies that have been affected by the health crisis but where long-term growth trends remain intact.
  • We’re avoiding sectors that were already in a decline that’s been accelerated by the lockdown, as well as those that were previously healthy but now face fresh challenges.

In the first half of 2020, global stock markets experienced a significant fall and a rapid recovery. We believed they were supported in their recovery, which appeared dislocated from the underlying economic environment. As investors, we favoured the technology and healthcare sectors as both continued to benefit from structural trends and the investment case around them had improved.

In particular, many technology companies have been significantly boosted by the Covid-19 crisis, as our economies have accelerated the transition from physical to digital. There has been a significant diversion in sector performance, with technology and growth sectors leading the market’s rise.

This Covid-19 crisis has imposed a downturn unlike any other traditional economic cycle, with its stringent restrictions causing an acute and severe fall in demand in many sectors. The recovery is likely to be different to previous ones, with a number of sectors permanently or temporarily impaired. Valuations have moved to reflect the new reality with significant discounts to typical levels of profitability.

There is an opportunity to selectively start to invest in high-quality companies that are structurally sound but have been impacted negatively by the crisis. It is likely that the road to recovery could take two to three years as demand recovers to pre-crisis levels.


The investment environment is likely to evolve as a new catalyst emerges in the form of medical breakthroughs, including both therapeutic treatments and vaccines. Early indications have been promising and, given the number of programs being developed, we feel that news from successful phase 2 and phase 3 trials over the second half of the year could be the greenlight for investors to move into recovery trades, focusing on companies that have lagged so far.

We group these recovery trades into three distinct categories:

  • Structurally challenged companies that have been further damaged by the crisis, which we consider unattractive investments. They include physical retail and automotive businesses. Consumer behaviour and preferences are likely to continue changing, and the financial positions of these companies have become precarious.
  • Previously healthy sectors that are now facing serious challenges. For example, office real estate is likely to suffer as remote working becomes a permanent feature of the post-Covid world.
  • Companies that have been affected by the crisis but have the potential to recover in the medium term and where long-term growth trends remain intact. They include stronger companies in the travel and leisure industry, as well as materials, aerospace and defence sector.

It’s important to distinguish where companies and sectors fit into these categories and avoid investing in the first two groups.


We believe the recovery will be volatile in the short term as the physical world lags the forward-looking nature of financial markets. Earnings are likely to recover more slowly than valuations as the market anticipates a road to normalisation.

On a two-year outlook, there appears to be a potential opportunity for investors who can weather the storm. Over the longer term, technology and healthcare companies are likely to remain solid performers, as ongoing trends in our economy and society drive their growth.


Globally confirmed cases of Covid-19 have now exceeded 18 million, up from approximately 16.3 million seven days previously. Financial markets are closely watching the pace and path of the virus outbreak in the US, where more stringent social distancing has recently been reintroduced. Although necessary from a health standpoint, it is having a negative economic impact.

Our baseline assumes continued economic repair – albeit asynchronously, with the US lagging behind Europe and China while dealing with the virus outbreak. For our view to change, there would have to be a substantial increase in coronavirus cases, and countries would have to restrain mobility and social contacts once again. If they didn’t, then their healthcare systems could be overwhelmed, which would force governments to go back to full lockdown even if, for now, they seem reluctant to do so.

Encouragingly, there are signs that virus infection rates are beginning to decline across America’s Sun Belt – the country’s most-affected area. Using data and analytics from COVIDcast, a Carnegie Mellon University unit specialising in epidemiological forecasting, we find several pieces of evidence suggesting this nascent trend may be gaining momentum.

This means the targeted measures that the US has recently implemented, which are similar to those that have so far proved effective in containing local outbreaks in Europe and Asia, are beginning to have some success. Therefore, there’s no need for the US to implement large- scale, full lockdowns across the nation. In turn, this means that its economic setback, where consumer spending on services is slowing again, is likely to be temporary, confirming our base case.

The COVIDcast data show that over the past several days, the share of doctor visits for Covid-like illness (CLI) symptoms has declined in nearly all US states. This indicates that the virus outbreak could be at the start of a decline, as the prevalence of CLI symptoms is a leading indicator of the pace and path of Covid-19.

Our findings suggest that in several states with elevated levels of new cases over 100 per million per day, new cases are on a sustained downward path. In most of these states, ranging from Florida and South Carolina to Texas and California, CLI symptoms peak about two to three weeks before the peak in confirmed cases. Arizona appears to be the only exception, where the decline in reported cases was roughly in line with the decline in symptoms.

Importantly, although available hospital capacity declined to low levels in some parts of the Sun Belt, government officials did not order full lockdowns – probably fearing a double-dip in economic activity. If it hasn’t happened so far, the confirmation of a declining trend in infection rates should lower the probability that economic activity will stall again.

However, about three-quarters of the US is currently suffering an elevated level of Covid-19 cases. So a major factor in determining the pace at which social distancing is lifted will likely be the level of new confirmed cases, not just their rate of growth. Therefore, economic reopening and consumer activity may still only improve slowly until virus cases are significantly lower.

Amrendra Sinha - Group Head of Direct Equities
Daniele Antonucci - Chief Economist & Macro Strategist
Bill Street - Group Chief Investment Officer

Contact us