Position for the upside

We expect the cheaper segments of the market to lead the way up.

At a glance

We are still confident that with positive medical developments and supportive stimulus measures, economies will reopen sustainably without a second wave of infection overwhelming health systems. This should leave room for stocks to run higher, especially in our upside scenario. In this scenario, we think the cheaper areas of the market would drive the upside including select cyclicals and value.


Diving deeper into our upside scenario

Our upside scenario sees a sustained economic recovery beginning and social activity returning to pre-pandemic levels in all major regions in the second half of 2020, thanks to successful deployment of test and trace methods, faster-than-expected large-scale production of a vaccine, or evidence that the "herd immunity" threshold is lower than currently thought. We see room for global stocks to move higher in both our central and upside scenarios. The global economy is starting to show signs of bottoming out. We think that surging money supply and aggressive fiscal stimulus are likely to be more powerful forces over the medium term and should be supportive of further upside potential in global equities. Particularly in our upside scenario, we expect gains in the cheaper areas of the market that have lagged in the rebound.


Low inflation expectations and extremely low bond yields have underpinned the outperformance of growth over value in recent years. These trends accelerated this year amid falling interest rates and growth expectations, as well as a simultaneous supply-demand shocks that have rocked global energy markets. If economic growth accelerates more quickly than currently expected by the market, and if the near-term disinflationary impact of lockdown measures recedes, the downward pressure on yields and energy prices should ease, which in turn should support a recovery in value versus growth. But do not see a full reversion to the mean, which would likely need rising bond yields as a precondition so we think a selective approach is required at this stage.

  • UK stocks. UK stocks trade at a large discount to global peers and to their own long-term historical valuation range. This suggests upside potential over a 12-month horizon. Net EPS revisions—the balance between upward and downward adjustments to analyst forecasts, indicating earnings momentum—are improving on the back of higher oil prices, but stock performance is still lagging. The UK market should benefit from a rotation out of defensive growth stocks into value names, given its large exposure to value sectors such as basic materials, energy, and banks, which account for a combined 40% of the FTSE 100 index.

  • US energy. Within value in the US, energy stocks have longer term appeal. The sector appears to be pricing in oil prices that are significantly below our long-term normalised oil price expectations. However, it may take some time for oil markets to get into better balance, which is a key catalyst to unlock the upside potential for the US energy sector.

  • Asian opportunities. In Asia, we also see laggards in the value space, particularly in select names in insurance and bank sectors and in holding companies and conglomerates.

The coronavirus crisis has hit cyclicals and smaller companies hard, as these economically sensitive businesses have suffered a significant drop in profitability. In our upside scenario we would expect cyclicals and smaller companies to begin to outperform.

  • US mid-caps. So far this year, US mid-caps still lag large-caps, due primarily to the stronger performance of companies exposed to "stay at home" trends. These companies are disproportionately represented in large-cap benchmarks, which also tend to be more defensive. In a recovery smaller companies tend to outperform because they are more cyclical and typically more leveraged to trends in the broader economy. As lockdowns and social distancing ease, we expect the economic recovery to broaden and gain more traction. This should disproportionately benefit mid-caps relative to large-caps.

  • European opportunities. In Europe, our favoured cyclical areas include Germany and European industrials. We also look for “laggards with growth” that have underperformed the benchmark in the past year, but have the ability to generate strong earnings growth in the coming year.

  • Beneficiaries of reopening. Meanwhile, as lockdowns are lifted, loose monetary policy and fiscal stimulus support should also drive consumer spending with well-positioned consumer brands likely to benefit. We see opportunities across Asia, Europe, and the US in re-opening beneficiaries.

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