Thematic investing in response to the pandemic

Kate Horne, Director at Linear Media recently sat down with Callan Boyle, Vice President of Fund Investments at Linear Investments to explore thematic responses to the current economic climate and the impact of the pandemic on the main asset classes. 

To begin their discussion, Callan explains how fixed income and equities have responded to the pandemic:

Fixed income: On a global level, governments are lowering interest rates to deal with the economy. Yields drop off on fixed income. This has potentially pushed some risk-averse investors into more riskier assets as the yield isn’t quite there in low interest rate environments. Government bonds are not producing as much in terms of returns that are required. The next step to that is credit and looking at investment grade companies. We have seen massive issuance of bonds this year looking to sure up their balance sheets. The uncertainty surrounding cash flows and earning in relation to the pandemic will potentially lead to some fallen angels. This means we might see some investment grade companies having their credit rating lowered so they will fall into a high yield category. There are quite a lot of investors who have come into this credit space sector due to the low yields with government bonds. The corporate sector is being propped up quite a lot with the amount of asset purchasing from central banks globally, so it has been quite an attractive space this year.

Equities: With people trying to find yield and returns in the market, people have stepped into equities. We have seen equities rallying and new highs in the S&P 500, so it has been interesting space with the backdrop of all the support from the government and the banks, which has helped this riskier asset class rally this year.

So what does this mean in terms of thematic investing?

Two particular sectors that have been interesting include technology and healthcare. Callan explains: ‘Technology has been an interesting topic for us. Over the past ten years, technology has been a massive driver of equities markets, especially in the US. This year, it has been up 20% on the S&P 500. It is a leading sector and in the climate of the pandemic, technology has been able to come through and solve a lot of problems. However that said, the valuations in technology is quite broad. There is quite a lot of high valuations within the sector. For Linear Investments, it serves us well to have managers who very well versed in that sector and are familiar with Silicon Valley and other central hubs of technology and they are able to weave their way through understandings the fundamentals of valuations, where the opportunities lie and where they might be overpriced.

Moving into healthcare, it is a sector that is on the minds of everyone. Like technology, the industry has stepped up with an unprecedented response to Covid-19. With the potential amount of purchases for PPE and the amount of vaccines that are there, it is a sector that is in high demand in response to the pandemic. Again, like technology, there is a wide remit of companies and there are sub themes to the sector. As a sector, it is up on year to date, not as much as technology, but it is up. Opportunities within the space include the virtual diagnosing and genomics. It serves to have analysts who are well versed within this sector and we are excited to have a really good manager operating within the health sector and provide active management of the fund.

As we continue into Q3 for 2020, two opportune sectors who investors include technology and healthcare due to their capacity to respond to the problems created by covid19. This includes helping society adapt to increased digital interactions and remote work, alongside the goal to cure disease and ensure health and wellbeing globally.