AVC Advisory’s Alan McGregor and Michael Barry interview Andrey Movchan, an asset manager and non-resident scholar of the Carnegie Moscow Center.
From a historical perspective of previous pandemics and market action, Andrey provides critical insights about the future of the world economy. He notes that by the end of April investor fear of COVID effects had diminished substantially, while economists focus on the widespread economic slowdown that has ensued. A new motto, “Make the Economy Great Again”, demonstrates the transition from one fear to another among policy makers around the world.
Currently Andrey see the risk premium in equity markets as quite high, but not necessarily overbought. Many companies are doomed to suffer, and therefore indexes may suffer, so investors need to cherry pick amidst the volatility. Increased volatility has created opportunities of some asset managers employing put selling strategies. We discuss these strategies in our weekly Friday Investment Talks.
Further, Andrey is wary that the current trends we see more clearly are not NEW trends – (online shopping, cloud computing and telecommuting). These trends have been around for years, but are now flourishing and can be overvalued if a sense of normalcy returns. He cites the activity in Zoom as an example of valuation exuberance if people start going back to work.
What are the long term trends? Andrey sees continued lack of interest in automotive companies, while ‘good technology’ is not overvalued. Also ‘big pharma’ is growing without the volatility of the small drug innovators. Also noted are online education, and semi-conductors which are immune to a US-China trade war.
Andrey reads through local markets for regional plays. He finds compelling stories in Korea, Hong Kong, and Sweden which historically has been an attractive market.
Andrey then fantasizes a little on what may and may not work in the future.
First, the need for office space will change but not so fast, as firms are under long-term contracts, but generally companies will use less space. There is more demand on online control systems, moving away from simply storing data to communicating data.
Second, education maybe swings back to a less virtual and more in-person as online education is an impaired form of education. Education is not about knowledge transfer – but about interaction, problem solving, networking, and cooperation. This is very hard to achieve by Zoom. There will be a split between knowledge transfer online solutions, and education will stay with universities and schools. Schools might become half a week at home, and half a week in class at school.
Third, the trend away from centres of megacities will like continue. People will spread about and spend more time in the countryside.
Fourth, policy makers have found a new favoured business. Previously large swaths of government budgets were spent on the defense sector. Now it’s healthcare. Andrey sees a window of high expenditure over the next five to ten years before people realise that viruses don’t happen often.
Fifth, central bank intervention is necessary on a large scale. Intervention was four times bigger in US compared to Russia. The US has 4X the number of small and medium size enterprises as Russia, so central bank stimulus seems on par for both countries. Meanwhile, there is a complete lack of inflation around the globe, supporting further stimulus from central banks and governments. Central banks are not focused on equity prices only – if equity declines 20 to 25% then they would be concerned more. If interest rates rise, investors would move away from equities. Until then stock markets are attractive.