The economy is not the market

The economy is not the market

In April, the US reported a quarterly GDP fall of 4.8% while the total number of people filing for unemployment passed 30 million. Yet the S&P500 entered a bull market and had its best month since 1987.

If you have been scratching your head over this massive diversion, you are not alone. Many investors have been wondering how this is possible and what it means. One investor posed this in the webinar with Nick, who answered it thus: 

"The equity market is not the economy. Yes, it should move in roughly the same way, but, ultimately, if you look at this particular crisis, it is very much affecting small- and medium-sized businesses, businesses with small balance sheets that can't really get them through this crisis. Yet, if you look at the S&P 500, it's full of companies that have great balance sheets that can get them through this crisis quite easily".

He went on to illustrate this by pointing out that while the NASDAQ is now down less than 5% for the year, the Russell 2000 index is still down by 30%. The Russell 2000 comprises the smallest 2,000 stocks in the Russell 3000 and is a popular proxy for small caps in the US market, and it is these small caps that don't have the balance sheet to carry them through.

In addition to that, the line up at the big end of the S&P500 has few stocks from sectors that have been hammered and is even led by beneficiaries of the crisis. The top 20 is dominated by stocks such as Microsoft, Amazon, and Alphabet which benefit from eight billion people staying home and spending more time online than ever.

Doubling down on key themes

While much is still uncertain, Nick was talking in terms of being 'further across the bridge' compared to when he gave his last webinar and said that:

"When you get to the other side, COVID-19 is literally just another structural change in the world that we need to look at and find who the beneficiaries are". 

If this pandemic had happened 20 years earlier, we would have been stuck at home with Nokia phones and dial-up internet. Luckily for consumers, it happened in 2020 when most of us have smartphones and fast internet, with most consumer items just a few clicks of the mouse away. Physical store closure has been more of an inconvenience than a problem. 

This paradigm has propelled the adoption of e-commerce, cloud computing and digital payments much further up the 'S-curve', which has a big impact on their forecasts and DCF calculations. As Nick said in the webinar:

"These companies will be better off on their three- to five-year view, so their earnings will grow, and hence, their share prices will grow. So from that point of view, we're still very much focused on these areas and if anything, we're doubling down on them".

Another theme Munro's backing is the growth in semiconductor demand. He laid out his full thesis recently in this interview, 'One thematic with three tailwinds'. 

Expanding on this thesis in this new webinar that a more aggressive rollout of 5G and the demands from 'track and trace' for mitigating risks from COVID-19 will only feed into this. 

Two reasons Munro is more fully invested now

In the previous webinar, they discussed how the fund had come through the March quarter with a 7.6% gain. This put them in a very strong position leading into April, however, given markets had just crashed, the tone at the time was naturally one of caution. 

One of the surprises on this new webinar was, therefore, to hear that the fund is already "much, much closer to fully invested". The two reasons were as follows:

The first one is around the COVID crisis as the curve's continued to flatten, and it's fairly clear now that we're moving into a market reopening phase. Secondly, I think the big change for us, was not long after the webinar, the Fed moved to support IG credit and high-yield credit markets. This was a fairly dramatic move they did just pre- and post- Easter. What that does is it does take some of the solvency issues we talked about off the table. 

Nick said the Fed move was a key catalyst for adding more exposure around Easter. April was certainly another good month for the fund with a 4.2% gain, beating the index and building on the strong March quarter. 

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