Weekly View - Just in case
Among its many consequences, the pandemic has brought an era of obsessive preoccupation with corporate efficiency to the detriment of other concerns to an end. In the words of Larry Summers, we are moving from a “just in time” to a “just in case” approach. That is as it should be and it should not have needed the virus to expose the inherently short-termist nature of ultra-lean production models. Clearly, manufacturers (and companies in general) have a responsibility to factor crisis situations into their production plans. This will likely result in higher inventories diversified by location and some duplication of supply chains. Accordingly, we prefer companies with lower leverage that can weather uncertainty and show more resilience in such crises.
The emphatic decision of the Italian people to abolish one-third of its political representatives by way of referendum said something about the regard in which the political class is held in that country. Implementation may not be so straightforward, but it sends a signal that political reform in Italy is no unattainable aspiration. The regional elections that accompanied the referendum gave cause for further comfort, with the prospect of governmental stability as far as 2023. Consequently, we are positive on Italian bonds in particular and on peripheral euro bonds in general. At the same time, rising covid-19 cases, disappointing PMI numbers and anxious Brexit negotiations ahead mean we are becoming less positive on euro equities. At the same time, Trump’s determination to rush through his new Supreme Court candidate clouds the prospects for agreement of a new fiscal package, and therefore the outlook for US equities.
In Japan, Suganomics is set to be a continuation of Abenomics (although prime minister Yoshihide Suga appears more focused on ‘bottom up’ economics than his predecessor, Shinzo Abe). We expect Mr Suga to preside over further consolidation of the banking sector and to increase competition in telecommunications in the year or so until the next elections. Unlike the euro area and US, the Bank of Japan’s direct support for equities and the presence of a lot of structural growers in the market, mean we are neutral on Japanese stocks.