Part 2: Five reasons for optimism
Running in parallel with those five short-term risks, are several indicators which we believe support an overall mood of cautious optimism for investors. The top five are:
1. Fundamentals remain strong
While growth is peaking in parts of the world, others are just at the beginning of their recovery phase (Europe, parts of Asia). Meanwhile, July and August could potentially offer the best quarterly year-over-year earnings growth rate seen in decades, fuelled by pent-up economies re-opening from lockdowns.
2. There is no over exuberance
Although one could argue there are bubbles forming here and there (cryptos, Special Purchase Acquisition Companies (SPACs), “meme” stocks), a lot of air has already come out of them and they remain relatively well-contained. Broadly speaking, investors are somewhat cautious as they continue to anticipate risks on the horizon. The strong investor consensus of an equity market pullback may reduce the chances of it happening.
3. Shocks are transient in nature
Brexit, Donald Trump’s election and now COVID-19 are all recent scenarios that have had no lasting impact on equity markets.
4. There is always a bull market somewhere
Volatility and periods of stress can bring opportunities for active managers to earn their stripes. This is why we believe that it might be worthwhile for investors to consider the value of having some actively-managed exposure.
5. Diversification should continue to pay off
Owning a diversified portfolio of assets remains, in our view, one of the most appropriate courses of action to consider for anyone who may have concerns that volatility is about to rise. If you’re a nervous investor, you might find the behavioural finance chapter in July’s Market Perspectives, particularly helpful.