The dawn of divergence and the art of subtlety

Multi-Asset Strategist Nick Samouilhan highlights the key divergences we should start to see as fundamental differences between companies, sectors and countries begin to matter more.

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As we enter the final stretch of 2020 and look toward 2021, I am focusing on the key divergences that should begin to occur as fundamental differences between companies, sectors and countries start to matter more, along with related investment
opportunities and risks. My main takeaway for this quarter is that I see a growing need for investors to become more subtle and specific when allocating assets in today’s environment.

The dawn of divergence

In retrospect, from an investment perspective, the striking aspect of 2020 was the commonality and dominance of the COVID-19 shock globally across geographies, economic sectors and individual securities (see Figure 1 in PDF available below):

  • At the country level, virtually every nation was impacted to some degree and, by and large, responded to the crisis in a similar manner.
  • At the sector level, a COVID-induced recovery/recession dynamic drove many sectors on a more or less cyclical/defensive basis.
  • Other divergences among sectors, where they existed, also largely derived from COVID, such as the outperformance of technology and health care.
  • At the security level, research by our fundamental factor team shows that a single factor — the degree of solvency risk due to the COVID impact — became incredibly important in explaining performance across securities, regardless of other fundamentals.

It is notable indeed how many investment decisions this year were focused around COVID and the many questions it raised. But while COVID will likely be with us for some time, I believe that…

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