Are you brave, or are you foolish?

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We asked Michelle Lopez, Head of Australian Equities at Aberdeen Standard Investments, if she was bullish or bearish on the outlook for markets.

“It's a very brave person that will give you a very high-conviction view of where markets are going at this point, or a foolish one.”

Lopez goes on to quote Aberdeen’s global economist who says that in an environment such as the one in which we find ourselves right now, his advice is to remain humble. 

In the short term, Lopez believes that the flood of central bank stimulus can continue to support markets, however, she doesn’t expect the subdued volatility of recent months to continue. In this short video, she shares her two main sources of concern and the types of companies she is looking to own through this period.

Click on the player below to watch the video or read the transcript below.


What is worrying you about markets right now?

What's worrying me about markets. I am worried, but that's not a bad thing. I think it means that we just don't get complacent. As you all know, there's a lot of risks at the moment and challenges that we're trying to overcome here.

I would probably say there's two main ones. The first one is this second wave that we're starting and that we're seeing play out, not just here in Australia, but more broadly, globally as well. And the second one is the dependency that we have on central banks and governments and the stimulus that they're providing.

So if I take the first one, which is the second wave, and it was our expectation, I think, the broad expectation that it was coming. What that effectively means is there's just a lot more uncertainty in the market. So, consumers and businesses are a lot more cautious, so they don't reopen their purses. And what that means is there's a real risk that that recovery that the markets were expecting in the second half doesn't play out. There's also, of course, the health implications of, and what that means, which again, is very severe. So that is one of the main concerns.

And then on the second side, and I mentioned, is this government and fiscal support that we've received. Australia's actually in a relatively good position when it comes to government debt. So, I think the numbers, as they stand, if we look at total debt within Australia, and that takes state and Federal combined, we're at that, I think it's at about a $1.5 trillion mark, and it's about 80% of our GDP. I actually read this morning that globally, for the first time in recorded history, the level of debt, of global debt, is going to be higher than global GDP. And that's, if you take it into context, there's $11 trillion that governments and central banks have brought and supported their economies to really come out of this point.

So, the way I view it is solvency is not in the central banks hands, liquidity is. But solvency is really in the ability of businesses to pay off their debts and services their debts from cash flows. And we're not going to really see what the outcome of all this policy is, until it gets lifted, if it's able to be lifted, because we have recently seen an extension as well of a lot of programmes. So, with that in mind, and just with all this flushing around, I think they're the two main risks that we're grappling with at the moment.

Are you bullish or bearish on the outlook for markets?

It's a very brave person that will give you a very high-conviction view of where markets are going at this point, or a foolish one. I'm not sure which one. Our economist, our global economist, Jeremy Lewis, and he always says, "When it comes to predicting and forecasting in the current crisis, it's best to remain humble." So with that in mind, if I do look at the next six to 12 months, there's this tussle between the economic and the health implications of the virus. And then you've got this underpinning of support by central banks and governments more broadly. The risk, and as I mentioned, is that expectation by the market that that support will continue. I think, over the next six months, it will. And that's really going to underpin markets over this very near term.

So taking that into account, I think there's certainly heightened volatility. We haven't seen much over the last three months, as we've gone through this recovery phase, or from a market point of view. So we are expecting more volatility and we really need to position portfolios for alternative paths at this point. And you do that through a balance of companies that have some defensive characteristics and predictability of earnings are high. And then you've got others that do offer you that exposure for when markets do pick up and they're able to participate in that.

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