Any post-coronavirus rally for those cyclical stocks able to survive the crisis will be "difficult to sustain" in a continued low growth, interest rate and inflation environment, according to Columbia Threadneedle's CIO William Davies.
One of the defining features of the coronavirus market sell-off seen in risk assets through late February and March, Davies said, was that market leadership changed little, with those stocks with higher-quality balance sheets continuing to outperform lower-quality names.
Between 19 February and 23 March 2020, for instance, the MSCI World IMI Growth index declined by 23.2%, less than the 30% loss recorded by its Value counterpart, according to data from FE fundinfo. In the first five months of 2020, global growth stocks were down by less than 1%, compared to value peers, which were 17.4 percentage points lower.
"During previous setbacks, those stocks that were highly rated came off a lot, which would have included some of those growth stocks," Davies explained.
"It has been different in this [setback] because it has been more like a traditional recession where the economy-sensitive stocks have been hit because there has been real evidence that the economy is contracting."
This Davies noted, is because many cyclical stocks in the value index are leveraged, either financially or operationally.
"Those companies may struggle to make it through to the other side of the economic contraction," he said.
"I would caution against investing in these companies at the moment. Because of the degree of the economic contraction, their ability to make it through the other side without some sort of support or refinancing [is unclear]."
Looking further down the road, if one dares, Davies said the picture is likely to change.
Once the recovery becomes clearer and nominal growth looks to be sustainably improving, some of those higher-risk companies that make it through are likely to re-rate, he predicted.
However, Davies doubts that period will last.
"We think it would be difficult to sustain, given that we believe, ultimately, we will return to a lowish growth, lowish interest rate, lowish inflation environment."
As a result, the CIO continues to prefer higher-quality, lower-risk investments. Within equities, Columbia Threadneedle favours those with "stronger balance sheets; the more growth, or quality-oriented companies".
"Although high yield has fallen more than investment grade, we would probably still look in credit at investment grade as being the more attractive from a risk-reward viewpoint because those companies by definition have the stronger balance sheets," he continued.
"While we do not want zero risk within portfolios, we are aware that we want to concentrate on the better quality, stronger balance sheet companies wherever possible."
When it comes to the recession and subsequent recovery in economic activity, Davies cautions investors against drawing parallels from previous downturns, particularly the Global Financial Crisis.
While previous recessions have been characterised by a slowdown in investment spending and increase in unemployment leading to a reduction in consumption growth, he pointed out that this time we have seen "a great big hit to consumption growth" due to lockdowns imposed worldwide.