The following is an excerpt from our recently published SWS Growth Equity 2Q Strategy Update, which is available here to download.
The second quarter was far from typical. The good news, we see our portfolio’s positioning in alignment with the sustainable drivers behind the market recovery’s shape. Indicators that we identified closer to the storm’s eye (back in March, April, and then May) have been reinforced by subsequent data releases, and it all revolves around exposure to the digital enablers as a key thesis component. This helps to clear the path through prolonged periods of uncertainty and impaired visibility. We take a stab at quantifying the economic magnitude that the market will be tasked to predict later in Market Perspective (see full quarterly here), but July demand proxies continue to net out to continued improvement.
Master of Many Domains
Piecing all of this together requires multi-domain expertise. Investors need a sharpened global lens (i.e. global macro expertise), a careful study of drug development (i.e. pharma expertise), an intimate understanding of the supercomputing horsepower being deployed (i.e. tech/data center expertise), all with a finger on the pulse of fiscal stimulus (i.e. political policy expertise). These disparate domains make for a tough sorting exercise by the average investor. However, we view the market’s reaction as a proxy for how these disparate domains are collaborating towards an assembly of solutions, specifically ones that will allow the gears of economic value creation to turn at a rate where they left off pre-pandemic.
Broken: Traditional Play Book for Recessionary Investing
At this point of downdraft recapture—we currently have recouped 89% of the high-water’s impairment—we can more definitively assess how traditional early-recession playbooks have faired. The Xs and Os on this whiteboard call for a rotation from tech, consumer discretionary, and industrials, and into utilities, staples, and healthcare (see chart above). This is often referred to as a “flight to safety.” However, the nature of our current disruption has blown a crater-sized hole into that playbook: the correct response increasingly reinforced is a “flight to digital enablers.”