Blog: You, us, everyone

Secular Outlook
Over the last three years, investment conditions have been highly difficult. Even before the start of the election campaign, we saw the US administration starting a trade war with China, acceleration on a global basis, geopolitical tension, populism, deflationary growth trends, financial vulnerabilities related to valuations issues (because of excess liquidity), and technological innovations that accelerated the gap between trendsetters and laggards.

In the past, we have argued that “investing in disruptors” sets an excellent long-term framework. Today, our strategy is being confirmed, with remuneration exceeding the average market return by a wide margin. Although markets may appear expensive, given the above average EPS growth outlook, we consider this group of companies to be appropriately valued. As the long-term consequences of the pandemic shock and its outcome start to take shape, we believe the current technology rally has steam to run even further – covering as much as 25% more ground.


_{Healing will be a long-term process}
Q1/2021 could mark the start of a long and sustainable healing process of world economies. There are two positive elements pointing toward this outlook:

1. The new US administration will be in place, bringing greater clarity about America's expected course of action (fiscal policy, QE, etc.)
2. Concerns around the pandemic are expected to start evaporating as new spikes in infections pass and when a vaccine (now expected to be available by mid-December at the earliest) allows for more effective curbing of the virus.

At present, the economy is in an early cyclical recovery phase. Naturally, economic pick-up will depend on the mood of the job market and subsequently, on consumer confidence. In a second phase, innovation will spell a lasting renewal overall. Obviously, this can only occur with the stop-gap measures in place from the governments and the central banks.

In this critical phase, “constructive disruption” needs to be time-tested to ensure developments serve to truly engage with Economy 4.0. The recent crisis may have caused disruptive trends to rise to the top, but the economic shift is not yet deeply rooted and permanent. We therefore expect disruptive trends to become even more pronounced in years to come, which supports our positive view of a strong equity performance of participating companies.

China:
As an economic power that disrupts higher-value-added producers elsewhere in the world and challenges the established geopolitical order dominated by Developed Market countries, China’s rise is likely to gain speed once more. The outcome of this challenge is in the hands of the consumers in developed markets. While stop buying products labeled “Made in China” we could inverse this order! On the other hand, it is true that Asia accounts for far more consumers, but these “internal” consumers focus on very basic mass products. Revenue and growth margins are therefore highly limited. If volume and margin growth start to occur, it will be positive for Asia, whose economy can perform independent of Western consumers.

Populism:
The pandemic-based recession and rising inequality are fertile ground for populism. However, we believe populism is close to peaking, if it is hasn’t already done so. We expect it to flatten out over time, while not disappearing completely.

Climate-related risks
More than ever, the impact of the humans and our economic activities on the climate has become clear. Main street companies have clearly recognized their social responsibility and have started drafting plans to become carbon neutral by a given date. These ramifications will obviously further accelerate the distinction between the brick and mortar and chip-based economies. It is only over time that winners and losers in the corporate sector will crystallize, but the shift to carbon-free business is likely to affect fiscal policy, capital flows, and asset prices. It is therefore crucial to actively manage credit and credit default swap risks.

Technology:
Knowledge-intensive companies will positively impact digitalization and create an important source of alpha for active investors throughout a secular trend. The longer the pandemic lasts, the less likely work and consumption behavior will return to pre-crisis levels. However, companies engaged in providing products and services in the field of 5G, Connectivity, Robotics and Automation, Transmissions, Measurements, and Biotechnology will exit the year 2020 with an even stronger disruptive force.

Monetary policy: Trapped
We expect policy rates in most advanced economies to remain low or go even lower, remaining so for a prolonged period of time.

See also our related article: https://www.irisos.ch/Community/Blog.aspx?blogid=1048&title=Steady-rates-until-2023

The low-return environment check
Ever since 1980, when short-term interest rates hovered around 15% p.a., investment conditions have been relatively easy; capital became ever cheaper, which in turn drove up valuation. This occurred regardless of the investment risk undertaken.

Both past and present central bank policies generate one byproduct – inflation. As a result, it is wise for all types of investors to re-assess return expectations. More importantly, instead of maintaining the expectation of high returns, thereby decreasing the underlying investment quality, it would be opportune to reduce return expectations.

Credit
Credit spreads are close to their lows; sporadic picks should be used to exercise long positions by means of an active name, security, and duration selection.

Market Neutral Opportunities
By now, active investors have become used to fast-moving roller-coaster market conditions. While it is not possible to forecast the longer-term economic outcome with any certainty, it is clear that out of the basket of selected companies, some will stagnate, while others will progress. This certainty may be translated into a capital gain strategy.

We believe emerging and disruptive companies generally offer the potential for higher returns than truly traditional markets and companies, given known market share and profit margins at the start of the strategy. Any significant disruption will shift these fundamental ratios and create dispersion1, which in turn makes the strategy perform.

Be prepared for bad news
The prospect of more difficult investment conditions and the potential for a rise in economic and market volatility is a call for capital preservation strategies. We continue to favor risk-adjusted opportunities in connection with truly AAA-rated companies, across different areas.

As an active equity manager, we focus on creating alpha. System-sourced and back-tested ideas are therefore of even greater importance to us. In a world full of disruption – with its accompanying opportunities and threats – IRISOS continually hones its technology, deploying targeted resources and expertise to strategies that generate highly efficient, risk-adjusted portfolios.

1. Dispersion: measurement of distance between groups of equities