Investing in tomorrow – An interview with Christian Gattiker, Bank Julius Baer

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In the below interview, Christian Gattiker, Head of Research at Swiss Wealth Manager, Bank Julius Baer talks about how the Covid-19 pandemic has impacted the way clients view investments and what are the key trends shaping the world of tomorrow.

How would you describe the current investment scenario in a world that is still tackling the challenges presented by the pandemic?

The current investment regime is a globally synchronised and mostly V-shaped recovery, helped by heavy monetary and fiscal stimuli. The world economy entered a synchronised shock-like recession in H1 2020 and is now recovering at different speeds. The main divergence in the speed of the recovery is the amount of fiscal and monetary stimulus available. The US, China and Japan have experienced a 10% downswing in economic output, while Continental Europe has experienced 15% and the UK 20%. Emerging markets have been hit hard but at varying degrees by the pandemic, with Latin America still in the doldrums. We expect most of the mature economies to compensate for about half of the shortfall during Q3, with a much slower pace thereafter. China is the exception, since the world’s second largest economy is back at pre-crisis levels as we speak in terms of economic output.

Has Covid-19 impacted the way that clients view their investment portfolio?

A flight into quality was the major move of private investors worldwide in reaction to the economic breakdown in H1. The main focus was on safe-haven assets, such as US Treasuries and German bunds, as well as US dollars, euros and Swiss francs. The cash ratio shot up markedly. On the corporate side, the preferred stocks and bonds were from companies that are less cyclically sensitive, such as in the healthcare and food sectors. There was a certain reluctance to chase the crisis winners in the new economy, such as in information technology and communications, whereas biotech and other healthcare-related issuers attracted more interest.

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Do you see any major impact in investment behaviour as a result?

Most investors are caught in a psychological trap, because they, by and large, missed the recovery in financial markets as of March 2020 or even sold into the downturn. Now, after many financial assets have made a tremendous comeback, they think it is too late to buy and maybe too early to sell. So ‘animal spirits’ are at work, and this usually has a negative impact on investor behaviour, i.e. creating self-inflicted damage to their portfolios. A lot of uncertainty is still around, in particular when it comes to cyclically sensitive or rate-sensitive stocks, such as banks. Overall, private investors are in a ‘freeze’ mode rather than a ‘fight’ or ‘flee’ mode.

What are the key trends that have surfaced as a result of the market changes due to Covid-19?

We observe an acceleration of existing long-term trends overall, such as in digitalisation at all levels, spanning from retail consumption to healthcare. In investment terms, the trend towards investing along environmental, social and governance (ESG) criteria is experiencing further tailwinds. Many investors have realised the vulnerability of many business models and appreciate the benefits of good governance and environmentally and socially sound behaviour from economic agents. Furthermore, the trend towards more active government spending is unbroken. The biggest shift has happened in Europe, where mutually guaranteed bonds were announced on a European Union-wide level. In our view, a move towards major fiscal spending globally is one of the biggest wildcards as a consequence of this health crisis.

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Are there any particular sectors that have been pushed to the forefront given the current circumstances?

As this is a health crisis, the healthcare sector immediately stood out as a central area of response to the crisis. The race for a vaccine is one of the fiercest ever in human history. The funds being spent and the speed at which innovation is taking place are unprecedented indeed. At the same time, recent progress in terms of medical analysis and treatment has been put to work quite effectively. This is to the benefit of biotech companies in particular. Outside healthcare, the technology sector also stands out. New economy businesses could leapfrog traditional bricks-and-mortar businesses by proving their superiority in times of lockdown; look at online retail, streaming services and video gaming.

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