Are we at an inflection point or a reflection point?

They may seem to diverge at times, but there is a strong connection between what happens in capital markets and the real economy.

Central-bank stimulus and exceptional government spending have seemingly had the intended effects, with equities having climbed to all-time highs over the past few months. Generally, we haven’t seen an economic implosion stemming from the slowdown in consumer spending or related job uncertainty.

Yet despite the unprecedented efforts to prop up the economy – here in the UK alone we have seen furlough schemes, a stamp-duty holiday on residential properties, and an ‘eat out to help out’ subsidy programme for restaurants – there have still been massive declines in economic output across the board, indicating there is currently a dislocation between fundamentals and share prices.

Fragile economies can trundle along and keep financial markets buoyant for quite a long time before general confidence levels falter, allowing debt to build up before the storm arrives. The bond markets are pricing at ‘just do it’ levels for governments (large swathes of the European sovereign-debt market are trading at negative yields) and companies can borrow inexpensively across the credit spectrum.

All the extra liquidity that has been pumped into markets, by central banks and governments, seems to have kept things afloat – for now. So is this just a good point to stop and reflect on our portfolios, or are we approaching an inflection point – for better or worse?

Theme time

Like everyone else, I don’t know what the next few months will hold. But that is why I find it helpful to focus on long-term themes, rather than short-term trends. We have identified a number of investment themes, all of which predate the pandemic, that we believe are here to stay, thanks to their well-defined growth trajectories based on secular demand.

While some companies, from those in cyber security to ecommerce, have enjoyed accelerated growth recently due to factors connected to the shutdown, the broader tailwinds such as changing demographics and disruptive technological innovation that are the true drivers of long-term growth are ones we continue to trust.

For example, the healthcare industry’s rapid response to COVID-19 – not just in terms of vaccine research, but also genome sequencing and diagnostic advances – has undoubtedly been impressive, but there is just as much to be excited about in other areas. Medicine is shifting to a more personalised approach and some of the creative solutions being generated by companies are potential game-changers: in genomics, 3-D printed implants, and robotic surgery to name just a few.

The nature of investing dictates that there will be highs and lows for all these themes, but I believe that picking a theme that resonates with you might mean you can stay the course and hold on through the inevitable ups and downs of markets. Diversification within a theme or even investing in a variety of themes can help with biases like regret aversion or the fear of missing out.

Here for good

Along the same lines, responsible investing isn’t really a trend or theme but it is an alternative way of thinking about portfolios that I believe is here to stay. Just like expressing conviction in a theme, investing according to your values could help you look through short-term volatility.

Seeing your investments make an impact helps in this regard too. The worldwide climate-change movement, along with the associated pressure being applied, is beginning to make a difference: all of Europe’s major oil companies have set targets to reduce their carbon emissions and some are even investing in greener energy projects.

So whether or not the economy and markets are at an inflection point, I am happy to reflect my own beliefs in my savings!