Beyond Bulls & Bears

Equity

Quick Thoughts: Active Investors Wake Up Before a Revolution

The world is waking up the 4th Industrial Revolution, with the impact of COVID-19 accelerating many changes already underway, says our Head of Equities, Stephen Dover. He opines on how underlying fundamental disruptions in our economy can present opportunities for active investors.

This post is also available in: French Italian Spanish

Remember the story of lazy Rip Van Winkle who slept for 20 years, missed the American Revolution, and awakened to a new country? Similarly, the world is waking up to the 4th Industrial Revolution, a time of massive change led by innovation, which the impact of the COVID-19 virus has accelerated. This year will be remembered as a tragic one, with much suffering and many lives lost, and also as a fulcrum for health, economic, and social disruptions.

  • Trends that might have happened over the next decade or so are accelerated into 2020. Tele-health, remote learning, working from home, internet retail, and many technological innovations are changing commerce and our ways of living and interacting. We are not going back to “the way it was” pre-COVID-19, especially now that it seems the pandemic will be with us for many more months.
  • Why are the US equity markets near all-time highs? One reason is because massive fiscal and monetary stimuli have put a backstop against corporate and personal insolvency. The downside risk has been reduced. Normally when you have a recession, the US equity markets drop on average around 40%.1
  • Due to tremendous social and economic changes, several notable companies are facing bankruptcy. Many of these “old economy” companies are closing more so because they are being disrupted by innovation, e.g., the “old” retail companies, than because of the economic slowdown. Their demise is primarily related to the acceleration of trends—changes in the way our economy and lives are structured.
  • There are some companies that will not make it through this upheaval and there are others that will forge a new paradigm. We should invest in companies that are innovators in their industries, and equally important, we need to avoid companies that will be disrupted. It could be as important to avoid bad companies as it is to find good companies.
  • Investors might look back on this time as a break from reversion-to-the-mean investing.

Over the next few months, it’s likely headlines will be filled with news on vaccine trials, political uncertainty, a deepening recession, and more social unrest. But underlying this are fundamental disruptions in our economy that will impact how we live and work—this also presents opportunities for active investors who are observing the longer-term trends.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of August 6, 2020, and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

The companies and/or case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton Investments. Past performance does not guarantee future results.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

 

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated, or may decline further in value. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.

______________________________

1. How Stocks Performed During The Past 6 Recessions” by Mike Patton, Forbes, March 30, 2020.

Keep Up to Date