Equities continued their recovery from their mid-March lows.
A combination of unprecedented policy responses and a flattening of the disease curve across geographies led to increased optimism and a reduction in risk aversion. This has occurred despite predictably appalling economic data and the associated negative revisions to earnings forecasts. For many companies, investors have written off the current year and are focused on the shape of the earnings recovery one or two years out.
There are still many things we don’t understand about Covid-19 but the incremental news flow, both therapeutic and epidemiological, has been positive. Notably, those countries where lockdown has been tentatively relaxed have yet to see a spike in infections. ‘Tail’ risks remain but look to have been reduced. It is important to recognise, however, how much we still don’t know, not only in terms of the disease but also about how economies will respond. This makes accurate forecasting exceedingly difficult, if not impossible. It has long been our contention that pattern recognition is a significant part of investment success. In this instance we are ‘flying blind’. There are no historical precedents. Understandably, therefore, investors have gravitated to those stocks that offer the greatest operational and financial certainty.