Global vaccination rate key to market performance

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The pace in which the world is able to vaccinate itself will fundamentally determine the ability of the global economy to return to pre COVID-19 levels, rather than fiscal and monetary policies such as tax changes, according to American Century Investments’ vice president and senior portfolio manager, Brent Puff.

Mr Puff said while newly-elected US President Joe Biden’s policy on corporate tax continues to unnerve investors and will affect companies including technology and healthcare, the pace of the progression out of COVID is of greater concern to the US-headquartered asset manager.

“The likelihood of more taxes is by no means immaterial in our investment decision-making, but the speed at which the global vaccination rollout continues will underpin markets for the remainder of this year.

“Tax changes will however play a role in how some particular sectors progress. President Biden has indicated he wants to make it more difficult for corporates to shelter profits in low tax jurisdictions. If tax rates go up, it will slow down the progression of corporate profits and healthcare and tech are the most vulnerable. The market will have to adjust to that reality over time.” he said.

Mr Puff said the market recovery is likely to have a pro-cyclical bias, favoring more economically sensitive sectors and industries. 

“The composition of equity markets around the world is not equal; the US market has a huge technology and healthcare component – around 40 percent – you don’t get that sort of exposure in other markets.  Non-US markets tend to be more pro-cyclical and may start to be favoured more than they have been in recent history,” he said.

We are closer to the trough than the peak, the economic tailwind will remain for the remainder of this year and into next year, said Mr Puff.

Vice president and Senior Portfolio Manager Trevor Gurwich agreed that the global vaccination rate remains critical.

“We have multi-factor models that scan the whole universe and look at companies by region, companies by sector, their relative growth rates, acceleration rates, earnings revision rates and the like.

“If we find a business that is inflecting positively and the improvement in fundamentals is  sustainable,  we’re benefiting from both that earnings growth –  which could be driven a new product launch or geographical expansion, for example – but also benefiting from that price-to-earnings re-rating opportunity. We believe the fact we’re global means we can be better small cap investors,” he said.

Mr Gurwich cites the Fund’s investments in online furniture retailers in the US, the Nordics, and Australia.

He said companies engaged in renewable energy supply will also attract investment flows this year and beyond. He believes stocks that are beneficiaries of government plans and regulations to cut CO2 emissions will draw investor interest.

“The US Government for example has green energy initiatives which include incentives and regulations for energy-saving measures which have impacted building codes and efficiency standards. The trend towards electrification and lighter parts within the auto sector is also closely tied to these trends, and is a space we are watching,” he said.

“We have a strong preference for companies that have stock-specific drivers of growth, such as a new management team or an improving competitive position.

“Importantly, the Biden administration is unlikely to change any of the policies relating to renewable projects as they tend to be quite cost competitive. Investments in energy efficiency will continue to increase, and it’ll be a key theme of 2021,” he said.

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