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Global Equity Strategy Summary

Core Content

This document outlines the current investment strategy in the context of the 'nu' variant of the coronavirus and its potential impact on global markets. The focus is on the equity markets, particularly in Europe, and the implications of the variant on economic activity, policy responses, and sector performance.

Main Concerns and Views

1. Concern about the 'nu' Variant

• The 'nu' variant is a greater concern than the recent rise in infections in Europe.
• Uncertainty surrounding the variant's transmissibility, vaccine effectiveness, and mortality rate is high, but it is expected to take about two weeks to get clearer data.
• The authors believe that the 'nu' variant will not significantly impact the overall economic outlook due to the following reasons:

2. Supporting Factors

• Improved Treatments: Antiviral pills (Pfizer and Merck) have shown high efficacy in preventing hospitalizations, with production ramping up rapidly.
• Rapid Vaccine Tweaking: Vaccine modifications can be done quickly (around 100 days), with existing infrastructure enabling fast distribution.
• Government Policies: Increasing use of legal measures and health passports to boost vaccination rates, especially for high-risk groups.
• Short-Lived Selloffs: Historical data shows that previous variants caused only short-lived market selloffs.
• Political Constraints: Long-term lockdowns are politically unsustainable, with governments likely to implement only short-term measures.

Key Information

3. Central Bank Policy

• Central banks are expected to delay tightening monetary policies due to uncertainty.
• Fiscal and monetary support will likely act as a bridge during the period of vaccine development and distribution.

4. Equity Strategy

• Overweight Cont. Europe: European markets are considered undervalued with P/E relatives at 12-year lows.
• Underweight Non-Financial Cyclicals: These sectors are seen as expensive and over-discounted, ignoring the flattening yield curve and recent earnings revisions.
• Opening-Up Plays:
  • Cruise Liners: Top of the composite scorecard, with potential for recovery due to structural supports and market consolidation.
  • Budget Airlines: Have shown strong performance, driven by pent-up demand and short-term capital discipline.
  • Banks: Remain relatively attractive with low valuations and support from monetary policy.

Sector Analysis

5. Performance and Valuation

• Cruise Liners:
  • Market cap has fallen more than net debt increased.
  • Valuation is low, with capex to depreciation at very low levels.
  • Structural supports include demographic trends and a catch-up trade in EU and Asia.
• Airlines:
  • Underperformed due to high oil prices and a weaker Euro.
  • EV/EBITDA valuations are relatively low, but sensitive to oil price changes.
• Hotels:
  • Have underperformed significantly and look expensive.
• Beverages:
  • Outperformed since infections rose in Europe, but are now considered expensive relative to US peers.
• Employment Agencies:
  • Look attractive on both P/E and EV/EBITDA metrics.
• Energy:
  • Valuation is low, and performance has been in line with the market.
• Real Estate:
  • Looks expensive despite strong performance in some areas.

Risk Assessment

6. Biggest Risk

• The risk of a new variant that is immune to current vaccines and emerges every 4 months, leading to permanent changes in behavior and economic activity.
• The authors believe this is unlikely, given the current vaccine development and distribution capabilities.

Outlook

7. Overall Outlook

• The authors do not change their major conclusions from the recent outlook, as the 'nu' variant is expected to delay rather than cancel the economic recovery.
• The equity risk premium and the stage of the cycle remain supportive.
• The authors expect a similar policy response as last year to prevent a sharp decline in economic activity.

Composite Scorecard

8. Composite Scorecard Highlights

• Cruise Liners: Top of the scorecard with strong valuation and performance.
• Energy: Also highly ranked, with strong valuation and negative correlation with infections.
• Airlines: Ranked third, with strong performance but sensitive to oil prices.
• Banks: Moderately ranked, with strong valuation but weak performance.
• Hotels: Lowest ranked, with poor valuation and performance.
• Beverages: Underperforming and expensive.
• Real Estate: Underperforming and expensive.

Conclusion

The authors remain overweight on European equities and underweight on non-financial cyclicals, believing that the economic recovery will continue despite the 'nu' variant. They highlight the importance of improved treatments, rapid vaccine development, and government policy in mitigating the impact of the variant on the economy and equity markets.