EQUITY PERSPECTIVES

MARKET GPS

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2 MAKING SENSE OF EQUITIES IN 2020George Maris, Co-Head of Equities – Americas

6 ACCELERATING AND EMERGING TRENDS WITHIN U.S. EQUITIESMarc Pinto and Jeremiah Buckley, portfolio managers

9SUSTAINABILITY AND DIGITALISATION: SPEEDING THE TRANSITION TO A LOW CARBON WORLD Hamish Chamberlayne, Head of Global Sustainable Equity

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EMERGING MARKETS: ‘A RISING TIDE WILL NOT LIFT ALL BOATS’Daniel Graña, portfolio manager

INVESTING IN HEALTH CARE POST COVID-19Andy Acker, portfolio manager

CONTENTS

HOW DO OPPORTUNITIES WITHIN ASIAN EQUITIES CHANGE POST COVID-19? Andrew Gillan, Head of Asia ex Japan Equities

OUR EQUITY CAPABILITIES

Independent thought and unique viewpoints are central to this approach and result in portfolios that are meaningfully different to an index. Each team expresses their individual, high-conviction ideas through processes that have evolved to suit their specific areas of the market and within robust risk control frameworks.

While operating with independence, the equities teams benefit from collaboration and shared research that provide a source of portfolio ideas. The culture encourages intellectual challenge and stimulating debate to test – and ultimately strengthen – investment thinking. The success of ideas is measured by overall client outcomes with the aim to deliver consistent, long-term risk-adjusted excess returns over benchmarks and peers regardless of the investment landscape. This effort is supported by award-winning, proprietary portfolio construction technology and a cultural emphasis on the client promise.

The equity teams, led by Co-Heads of Equities Alex Crooke and George Maris, include 167 investment professionals, responsible for US$149.9bn in assets under management1. The teams include those with a global perspective, those with a regional focus – US, Europe, Asia Pacific and Emerging Markets – and those invested in specialist sectors. A range of growth, value and absolute return styles are employed.

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JANUS HENDERSON PROVIDES AN ACTIVE APPROACH TO EQUITY INVESTING. THE EQUITIES PLATFORM IS SHAPED BY THE BELIEF THAT FUNDAMENTAL RESEARCH* IS THE FOUNDATION FOR DELIVERING ALPHA*.

GLOBAL TECHNOLOGY

GLOBAL LIFE SCIENCES / BIOTECH

GLOBALPROPERTY

GLOBALSUSTAINABLE

GLOBAL NATURALRESOURCES

ABSOLUTERETURN

SPECIALITY EQUITIES

USmultiple styles

EUROPE / UKmultiple styles

ASIA PACIFICmultiple regionsand styles

EMERGING MARKETSmultiple regions

REGIONAL EQUITIES

GLOBALUS- & UK-basedteams, multiple regionsand styles

GLOBAL INCOMEmultiple regionsand styles

GLOBAL EQUITIES

1. Source: Janus Henderson, as at 31 March 2020.

*Fundamental research: The analysis of information that contributes to the valuation of a security, such as a company’s earnings or the evaluation of its management team, as well as wider economic factors. This contrasts with technical analysis, which is centred on idiosyncrasies within financial markets, such as detecting seasonal patterns.

*Alpha: Alpha is the difference between a portfolio’s return and its benchmark’s return after adjusting for the level of risk taken. A positive alpha suggests that a portfolio has delivered a superior return given the risk taken.

MAKING SENSE OF EQUITIES IN 2020

In early 2020, the outlook for the global economy seemed promising. China and the U.S. were making progress on trade talks. In the UK, Prime Minister Boris Johnson negotiated the country’s exit from the European Union, providing a sense of finality. U.S. unemployment was at record lows and declining. Global gross domestic product was growing in the most robust manner in more than a decade, helping fuel global equities to all-time highs.

Then news arrived in late February of a novel coronavirus – one that emerged in China in December but was largely contained to Southeast Asia – aggressively spreading in northern Italy and much of Europe. Facing the risk of a global pandemic, the economic outlook changed dramatically. Just as the reality of a global pandemic was developing, Saudi Arabia and Russia entered into an oil price war. This price war, at a time when oil demand was falling off a cliff, caused crude prices to crater quickly and further compounded the uncertainty around economic activity. The S&P 500® Index fell 8% in one day. Then 10%, then 12%. By mid-March, the benchmark declined 34% in just 23 trading days, entering bear-market territory in record time.1

UNCHARTED TERRITORY The market decline reflected the potential deleterious impact of the COVID-19 coronavirus on the global economy. As entire countries locked down their societies to slow the virus’s spread, business activity across many industries ground to a halt. The damage soon piled up. In the U.S., month-over-month retail sales fell a record 16.4% in April (following a decline of 8.3% in March).2 Germany and Japan entered a recession, with Germany’s economy shrinking 2.2% during the first quarter and Japan’s 3.4%.3 In light of plummeting air travel, Singapore Airlines cut passenger capacity by 96% from April through June.4

The drawdown was remarkable for its speed and ferocity and was likely amplified by market structures known as algorithmic, or model-driven, trading strategies. These strategies, which surged in popularity in recent years and by our estimate now make up some 60% of all trading activity, use computer models to buy or sell stocks based on factors such as risk parity, momentum, liquidity or volatility. Often, leverage is employed to enhance returns. As the outlook for 2020 abruptly changed and market dynamics shifted, these models triggered swift and intense selling to try to keep portfolio characteristics within predefined ranges. Funds using leverage were under even more pressure to meet margin calls or reduce risk. These actions fueled the market’s downward momentum and caused liquidity to tighten.

George Maris, Co-Head of Equities – Americas, recaps equity market volatility in 2020 and what investors should consider as the outlook for the global economy remains unclear.

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KEY TAKEAWAYS

f The market sell-off in March was remarkable for its speed and ferocity, likely amplified by algorithmic trading strategies forced to sell stocks as the economic impact of the pandemic grew.

f However, large tech and communications companies proved resilient, lifting some indices off recent lows and inflating index price-to-earnings ratios*.

f Most stocks remain in bear-market territory. For investors, we believe the key is to test assumptions about a company’s long-term growth and consider whether current share prices reflect longer-term earnings trajectories.

Source: Getty Images

MAKING SENSE OF EQUITIES IN 2020 (cont.)

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Source: Bloomberg, data from 13 December 2019 to 15 May 2020.

U.S. EQUITY MARKET VOLATILITY AND VOLUME Algorithmic selling aggravated the market’s decline as positions were often exited at any price. As liquidity became scarce, relative trading volumes and depth lagged.

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AVERAGE RETURNS VS. TYPICAL STOCK PERFORMANCEHowever, as painful as the sell-off was, it didn’t seem to last long. Many widely followed indices have retraced at least part of their losses since March, with some benchmarks, such as the tech-heavy NASDAQ Composite Index, now essentially flat for the year.5

Look closer, though, and it becomes clear the rebound lacked breadth. As shown in the chart below, most of the gains are concentrated in a handful of mega-cap tech and communications firms, which benefited from rising demand for digital solutions during the pandemic and from their cash-rich balance sheets. The influence of these stocks is unprecedented. Just five companies – Amazon, Apple, Facebook, Google and Microsoft – constitute nearly 50% of the NASDAQ, as well as significant portions of the Russell 1000® Growth Index and the S&P 500.6

But while the largest five stocks helped lift the average return of indices, the performance of the typical stock looks vastly different, with many shares remaining deeply in the red. Value stocks (i.e., equities that appear inexpensive relative to a company’s underlying fundamentals) are still in bear-market territory. Small-cap shares, as measured by the Russell 2000® Index, are down 24% year to date, with micro-cap companies tending to lag by a much wider margin as investors worry about these companies’ ability to access capital and repay debt amid plummeting revenues.

Perhaps most surprising, stocks that performed the worst during the sell-off did not carry high multiples heading into the pandemic. On the contrary, many of these equities possessed price-to-earnings (P/E) ratios that looked attractive compared to the index average or history. Conversely, the P/Es of mega-cap stocks sat in the top quintile. Many who thought higher valuations presented risk prior to the outbreak and positioned themselves more defensively from a valuation perspective, but perhaps not from a business model perspective, suffered.

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THE CONUNDRUM: WHAT ARE STOCKS WORTH NOW?This bifurcation skewed P/E averages, with some benchmarks trading at a premium to historical levels. The challenge now is discerning what represents attractive risk/reward opportunities, particularly when earnings and revenue forecasts are often impossible to forecast given the unpredictability of the pandemic. Economies are slowly reopening, but COVID-19 continues to present significant health risks and there remains the uncertainty as to subsequent outbreaks later this year. Against this backdrop, we think it is critical to look through the average and study companies case by case. What aspects of the economy are permanently impacted – positively or negatively – as a result of changes to consumer behavior or industry needs? What industries will likely recover, and what new opportunities could be created?

MAKING SENSE OF EQUITIES IN 2020 (cont.)

-60%

-40%

-20%

0%

20%

40%

NYSE FANG+ Index

Micro CapRussell 1000 Value Index

Russell 2000 Index

Russell 1000 Index

Mega Cap

-0.6

-10.9

-24.3 -22.4

-51.8

18.3

Ret

urn

Source: Bloomberg, data are year to date through 15 May 2020. NYSE FANG+ is an equal-dollar weighted index comprised of select highly traded mega-cap technology and consumer discretionary stocks.

2020 U.S. EQUITY RETURNS The largest tech and communications companies have far outpaced the broader market.

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Long-Term AverageTop 5Without Top 5S&P 500

23.89

19.99

38.34

16.50

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war

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/E R

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Source: Bloomberg, data as of 18 May 2020. P/Es based on full-year 2020 earnings estimates. Long-term average reflects data from March 1990 to May 2020

S&P 500 INDEX FORWARD P/E RATIOThe S&P 500’s 45% premium to its long-term average is influenced by its five largest holdings; excluding those, the index trades at a still elevated – but more manageable – 21% premium.

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When viewed through that lens, firms trading at high multiples but likely to grow at accelerated trajectories may warrant steep price tags. Meanwhile, some beaten-up stocks could be attractively valued if the underlying businesses remain viable over the long term. For firms where the outlook is dubious – whether because of secular* economic shifts or heavy debt loads – a cheap stock price may not be sufficient reason to invest.

We think investors should brace for continued uncertainty for the remainder of the year. But even amid a volatile backdrop, staying true to time-honored investing principles – focusing on business fundamentals, testing and retesting assumptions and staying mindful of price – should serve investors well over the long term.

MAKING SENSE OF EQUITIES IN 2020 (cont.)

MAKING SENSE OF EQUITIES IN 20201. Bloomberg. A bear market is a decline of 20% or more.2. U.S. Census Bureau, as of 15 May 2020.3. Destasis Satistisches Bundesamt, as of 15 May 2020; Economic and Social Research Institute of Japan, as of 18 May 2020.4. Company report, as of 14 May 2020.5. Bloomberg, as of 15 May 2020.6. Bloomberg, as of 15 May 2020.

* Price-to-Earnings (P/E) Ratio: A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio.

* Secular: Secular themes and trends are not seasonal or cyclical. They are long term in nature.

Portfolio managers Marc Pinto and Jeremiah Buckley discuss accelerating and emerging themes amid the COVID-19 crisis and which companies stand to benefit.

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LONG-TERM SECULAR TRENDS ACCELERATEIn the face of the near-term uncertainty resulting from the COVID-19 crisis, we believe many long-term secular themes remain in place, to the potential benefit of specific industries and companies. Themes associated with technological innovation, for instance, have in some cases accelerated in the face of social distancing. The shift to cloud computing and growth in Software as a Service business models has been spurred along by a need to provide information technology resources to employees forced to work remotely. Before the crisis, these themes were providing individuals and enterprises with improved economics, flexibility and ease of use – traits that have led to increased adoption during the crisis, further strengthening the secular trends.

Changes in consumer behavior have also quickened the pace of long-term trends like e-commerce and digital payments, as widespread stay-at-home orders have forced many to adopt these services. These behavioral changes will likely remain entrenched after the pandemic now that individuals have become more comfortable using the services and accustomed to the conveniences they provide. Payment companies may suffer from lower volumes as a result of spending cuts, rising unemployment and stay-at-home restrictions. However, as the economy recovers, the shift to digital payments should continue to strengthen.

Lastly, the importance of innovation within the health care sector has been heightened by this crisis. Research and development (R&D) within the sector is driving advances in both treatment for patients and the technology and equipment used by health care professionals, leading to increased safety and productivity. Health care companies that are improving treatments and outcomes for patients and providing more economical medical solutions should be positioned for success once we emerge from the crisis.

ACCELERATING AND EMERGING TRENDS WITHIN U.S. EQUITIES

KEY TAKEAWAYS

f As we move further through the economic fallout from the COVID-19 pandemic, many pre-existing long-term secular* themes continue to accelerate.

f While a number of industries may face negative long-term impacts, others may be poised to benefit from behavioral changes in the wake of the crisis.

f Companies with stronger balance sheets and ample liquidity may be able to invest and adjust accordingly to emerge in a position of strength relative to their competition.

Source: Getty Images

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OTHER INDUSTRIES MAY BE PERMANENTLY IMPAIREDIn the wake of an historic shutdown of commerce driven by restrictions on people’s ability to travel and congregate, a tremendous amount of economic strain has been placed on certain industries. While some may see a delayed recovery in demand for products and services, others may experience permanent demand destruction. For instance, despite being recently positioned to benefit from long-term secular tailwinds, the travel, hotel, restaurant and leisure industries may face significant long-term structural change as a result of this crisis. As we continue to have little clarity around the trajectory of the virus and the ultimate economic impact, companies in these industries have limited visibility into when, or if, demand may return. Many will be forced to issue debt through the public markets or borrow cash from the government, repaying the loans through equity ownership stakes, further hampering their recovery efforts.

The energy sector is another area that has suffered and may be permanently impaired. Markets were already burdened with excess supply as a result of an oil market-share war between Saudi Arabia and Russia. COVID-19 has only exacerbated that situation by creating a demand shock leading to further swelling of inventories. Oil prices have fallen below economically profitable levels for many U.S. energy firms, and companies are being forced to navigate through the crisis by taking on debt, cutting capital expenditures and reducing dividends, among other tactics.

EMERGING THEMES TO WATCHSome industries, fortunately, have been able to remain stable, and, indeed, some have seen an acceleration in demand as a result of the crisis. Social-distancing restrictions have clearly benefited grocery retailers, manufacturers of grocery products and makers of cleaning and personal care products. These companies have witnessed an uptick in demand as consumers stock their pantries, preparing to stay at home for an extended time. These industries should continue to be positively impacted for as long as people will be forced to stay at home and, potentially, after, depending on how consumer habits change as a result.

Another subset of companies that have profited are those that have been able to forge direct-to-consumer relationships. With restrictions on non-essential businesses, those with remote engagement capabilities have enjoyed an advantage, in industries as diverse as footwear and insurance. These companies control their own destiny, so to speak, by dictating the interactions with their customer. Indirectly enabling those relationships are software and technology service providers, including consultants, who have worked with companies to help them through the process of digitization. Companies that have forged or strengthened direct-to-consumer bonds during the crisis, as well as the software and technology service providers needed to support them, could be well placed to benefit from permanent change in consumer behavior on the other side of the pandemic.

ACCELERATING AND EMERGING TRENDS WITHIN U.S. EQUITIES (cont.)

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ACCELERATING AND EMERGING TRENDS WITHIN U.S. EQUITIES* Secular: Secular themes and trends are not seasonal or cyclical. They are long term in nature.

HOW WILL SECULAR THEMES BE IMPACTED BY THE PANDEMIC?COVID-19 has accelerated and altered the growth dynamic for many companies and industries. Here is a summary of the potential impact on some secular themes:

Accelerating Emerging Impaired

Technological innovation – cloud computing and growth in Software as a Service business models

Beneficiaries of social distancing – grocery retailers, manufacturers of grocery products and makers of cleaning and personal care products

Restricted movement has hit travel, hotel, restaurant and leisure industries

E-commerce and digital payments – as stay-at-home orders have forced many to adopt new practices

Direct to consumer interactions – benefiting software and technology service providers

Sharp falls in demand have negatively impacted energy companies

Health care innovation – increased R&D is supporting advances in treatments and technology and equipment

THE VALUE OF BALANCE SHEET STRENGTHIn general, we expect companies with stronger balance sheets and ample liquidity to better adjust to the current environment. And by investing now, these entities could even emerge in a position of strength. As these companies assess their cash flow levels and liquidity options, some may draw on available credit lines, and others may issue debt in the investment-grade market, which has been active and relatively low cost to date. Their goal is to not only ensure that their balance sheets are in a healthy position to weather the current crisis, but also to invest in marketing and positioning their businesses for growth after the storm. Some entities may even seek to acquire assets from distressed sellers to eventually take substantial market share.

Crises like these generally allow the best-positioned companies to thrive at the expense of those in weaker financial situations. As investors, it is now more important than ever to identify companies that are in a position of financial strength and those in a favorable competitive position to capitalize on long-term secular themes.

ACCELERATING AND EMERGING TRENDS WITHIN U.S. EQUITIES (cont.)

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For the past six months COVID-19 has changed the way that we live and operate across the world. Shelter in place orders and governmental lockdowns have been implemented globally causing unprecedented economic and social dislocation. But this dislocation has not been uniform. Many people and businesses have been quick to adapt to a world of travel restrictions and social distancing. The common link to this economic resilience is digitalisation.

From productivity to entertainment to health, digitalisation has provided the means to carry on. Cloud computing, cashless payments and online everything are features of the digital economy that have enabled us to live and succeed in a way like never before. And while the ‘digitalisation of everything’ is not new, the crisis has certainly highlighted the developments that have already been made, even accelerating them in some instances. It is a structural shift that has been happening for a long time, now spurred on by the crisis, and we believe that it is key to reaching a sustainable economy.

DIGITAL PLATFORMS SPURRED ON BY THE CRISISMicrosoft CEO Satya Nadella recently summed this up well in his most recent earnings call in April, stating that the company experienced “two years of digital transformation in two months”, and the figures tell the same story. In March alone, the Microsoft Azure blog reported a 775% increase in cloud computing usage in regions with social restrictions and a spike in Microsoft Teams users, with 900 million minutes of meetings and calls made in a one-week period (as at 28 March 2020). But this is just the tip of the iceberg in terms of digital uptake. From online groceries to telemedicine to remote working and virtual classrooms, many people will have experienced digital platforms for the first time. But are these platforms powerful enough to sustain a lasting change in customer interaction once the crisis abates?

It is our belief that companies that enable greater productivity and a more efficient use of the world’s precious natural resources will succeed over the long term. We consider digitalisation and sustainability to be two sides of the same coin by empowering people and businesses to work, live and succeed effectively without the need for an excessive carbon footprint. If any good has come out of this crisis, it is that it has served to underline the idea that many people are able to lead lower carbon lives effectively.

Some sectors fared worse than others in the crisis – namely travel, transportation and heavy industrials. Airlines and cruise liners ground to a halt and were among the most severely affected as social distancing measures and travel bans were enacted across the world, with global air traffic dropping by 65% in the one month period to 7 April according to a snapshot of flights in the

KEY TAKEAWAYS

f The COVID-19 crisis has highlighted, and in some instances advanced, the developments made in the digital space and has proven society’s ability to function effectively in a low carbon way.

f The pace of the transition to a low carbon economy is ramping up, exemplified by new climate laws enacted in the EU, and we believe it is important to be aligned with this sustainable future.

f Exciting advancements in the efficiency of battery technology for electric vehicles could take us one step closer to achieving a low carbon economy.

Hamish Chamberlayne, Head of Global Sustainable Equity, explores the advancements made in the digital space and how this is closely linked with a sustainable future.

Source: Getty Images

SUSTAINABILITY AND DIGITALISATION: SPEEDING THE TRANSITION TO A LOW CARBON WORLD

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air by flightradar24.com. While lockdown has exposed the weaknesses in this industry, we believe that it has only accelerated an already existing, and in our opinion unstoppable, transition to a low carbon economy as new technologies develop and the regulatory burden associated with carbon intensifies. In fact, amid the COVID-19 panic, the EU unveiled plans for a new climate law that will commit countries to reduce net greenhouse gas emissions to zero by 2050.1 Ursula von der Leyen, President of the European Commission, announced on 4 March in Brussels that this was a “political commitment and sets us irreversibly on the path to a more sustainable future”, echoing our view.

GAME CHANGING BATTERY TECHNOLOGY

One area where we are seeing exciting steps towards a low carbon world is the advances in battery technology. Over the course of the last year there have been a number of research papers that point to potentially game changing developments in the world of batteries in electric vehicles. Currently, one of the biggest problems with batteries is the trade-off between combining high energy density with battery longevity and safety. Studies, however, show that we are reaching a stage where these issues can be solved. At the materials level, research has indicated that cobalt, an expensive but necessary resource, could potentially be designed out of batteries with new material technology. Are we finally close to the time where both the performance and cost of batteries reach a point that catalyses widespread consumer adoption of electric cars? Elon Musk’s ‘million-mile battery’ is perhaps not as far away as once believed and it is developments like this that take us closer to functioning in a low carbon economy.

We are living in a period of such exceptional change – characterised by the digitalisation of everything and the transition to a low carbon economy – and while the COVID-19 crisis may have highlighted, and in some cases accelerated these trends, we believe that they are structural shifts that were happening long before the crisis and will continue long after. We see a strong link between sustainable development, innovation and long-term compounding growth. Our investment framework seeks to invest in companies that have a positive impact on the environment and society, while at the same time helping us stay on the right side of disruption and benefit our investors.

SUSTAINABILITY AND DIGITALISATION: SPEEDING THE TRANSITION TO A LOW CARBON WORLD (cont.)

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Source: Flightradar24.com total number of flights tracked by flightradar24 per day from 20 January 2020 to 18 May 2020. Microsoft Teams users figures from Microsoft press releases and earnings call as at 20 May 2020.

AS FLIGHTS PLUMMET, MICROSOFT TEAMS USERSHIP SOARS

SUSTAINABILITY AND DIGITALISATION: SPEEDING THE TRANSITION TO A LOW CARBON WORLD1. https://ec.europa.eu/clima/policies/eu-climate-action/law_en

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HOW DO OPPORTUNITIES WITHIN ASIAN EQUITIES CHANGE POST COVID-19?

In Asia, as with other regions, the experience so far has been that COVID-19 has either accelerated or emphasised some of the changes, tensions and challenges that were apparent before the virus appeared. Even as the crisis subsides, some of these are likely to have longer-term implications for how we interact and offer investment opportunities.

First, online and asset-light business models (that have fewer physical assets relative to the value of their operations) have proven more resilient so far, with significantly less disruption to their existing businesses. As an example, consumption habits and daily activities have adjusted to more time spent at home, which has led to increased usage of streaming services, computer gaming and e-commerce in general.

Second, the relationship between the US and China has once again deteriorated, reversing the progress made following the phase one trade deal. At the time of writing it is being suggested that the US is seeking compensation from China given the origins and global impact of COVID-19. Equally concerning is the US government’s decision to place restrictions on suppliers to Chinese technology company Huawei, citing national security concerns; this is likely to result in some form of retaliation from China.

Third, stock markets of the more emerging nations within Asia that are less capable of providing fiscal support to boost their economies, such as India, Indonesia and the Philippines, have been among the hardest hit despite possessing attractive demographics and compelling long-term consumption stories.

HOW HAS THE VIRUS CHANGED SENTIMENT TOWARDS ASIAN EQUITIES?Globally, the majority of asset classes that carry a degree of risk have sold off since the January and February market highs, and it is no surprise that Asian equities, along with other emerging market equities, have fallen significantly to date in 2020, although there has been some recovery from the March lows, with China particularly resilient. Asian equities as an asset class has suffered outflows; but flows into China have generally been comparatively favourable (year-to-date to 13 May, see chart); a key driver has been the country’s increased benchmark weighting in global indices such as the MSCI Emerging Markets Index.

KEY TAKEAWAYS

f The coronavirus has accentuated the widening gap between companies that can be classified as ‘winners’ and the rest of the market, and investors are discriminating against stock markets of countries with weaker fiscal* positions.

f Overall, Asian equities have traded significantly lower, but the Chinese stock market has been particularly resilient.

f While it may be a painful short-term shock to Asian companies and economies, we do not expect COVID-19 to alter the long-term growth potential that Asia offers.

Andrew Gillan, Head of Asia ex Japan Equities, explores the impact of the pandemic on Asian equities and explains why structural growth stories remain intact.

Source: Getty Images

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2020 had started on an optimistic note, following the US-China trade war resolution, but the increasing news flow initially about the virus in China just before the Lunar New Year holidays resulted in market weakness. This spread like the virus to the rest of the region and globally, as the full economic impact of COVID-19 started to become apparent. We have witnessed an unprecedented fiscal response to the crisis in the US, and while Asia too has seen significant monetary* and fiscal response, it has not been of the same magnitude as seen in some larger developed countries.

There have been some success stories in containing the virus but there are also signs of a ‘second wave’ in countries like China and South Korea. Clearly the overall impact on the economy of certain countries is likely to be more pronounced. The evidence so far suggests that social distancing and changes in pre-virus behaviour and consumption patterns may lead to longer recoveries for some sectors. In our view, while the overall economic impact may be temporary, the longer-term trends should return to normal. In other words, Asia has the potential to continue its strong economic growth in the coming years after significantly lower gross domestic product (GDP) growth, including contractions, in 2020. We believe the same is true of corporate earnings; while they will likely weaken in 2020 and some sectors may take longer to recover, we are confident that a return to superior earnings growth for many Asian businesses is likely.

HOW DO OPPORTUNITIES WITHIN ASIAN EQUITIES CHANGE POST COVID-19? (cont.)

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Source: EPFR Global, Citi Research. Asia ex Japan 52-week cumulative equity fund flows to 13 May 2020. ASEAN (Association of Southeast Asian Nations) includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

OUTFLOWS FROM THE REGION – BUT CHINA REMAINS FAVOURABLE

WINNERS AND LOSERS – THE IMPORTANCE OF BALANCE SHEET HEALTHIn the short term, the virus has had a significant impact on some structural* areas of growth in Asia, particularly travel and tourism-related sectors, but also other consumer discretionary areas. Some of these will recover relatively quickly but others may take longer to return to pre-COVID-19 levels and valuations will need to adjust to that.

Social distancing means that seating capacities will be reduced within offices, restaurants and entertainment venues, while modes of travel will also be affected. Many businesses providing online services have extended their leadership during the crisis and look set to continue to thrive, provided their competitive advantages (and barriers to entry) are maintained.

Similarly, a number of Asian companies that supply vital components to the global technology supply chain have proven resilient during the crisis, and also look well positioned for the future. The tougher conditions are highlighting the strengths and weaknesses of corporate balance sheets; companies with less debt and strong cash positions are ever more likely to command premium valuations in the current environment and that of the foreseeable future.

INVESTMENT THEMES REMAIN, WITH THE YOUNGER POPULATION KEY TO GROWTHWe do not see significant shifts in terms of the investment themes that will prevail after the crisis. COVID-19 has, however, resulted in heightened macroeconomic risks, which vary greatly from country to country within the region. As a result, we see more compelling opportunities in developed Asia and North Asia, including China, Taiwan and South Korea. We are less positive on Southeast Asia and see the previously strong case for allocations to India weakening to a degree as a result of the crisis. While the crisis has led to a shakeout of markets globally, we believe the most compelling structural growth opportunities in Asia remain intact and can be found within the technology and consumer sectors. With Asia benefiting from its huge younger population with rising incomes, this demographic is generally more willing to adopt new technologies and adapt their ways of life. This is an attribute that will prove as important as ever in the post COVID-19 world.

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HOW DO OPPORTUNITIES WITHIN ASIAN EQUITIES CHANGE POST COVID-19? (cont.)

HOW DO OPPORTUNITIES WITHIN ASIAN EQUITIES CHANGE POST COVID-19?* Fiscal policy/response: steps taken by a government to influence economic conditions by reducing/increasing government spending and/or raising/reducing taxes.

* Monetary policy/response: the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It involves controlling interest rates and the supply of money.

* Structural growth: a more permanent significant shift in the way a country, industry, or market functions, generally driven by major developments such as technological innovation, supply and demand of resources.

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Portfolio manager Daniel Graña argues that a large disparity is likely between the success stories of certain emerging market countries and the failures of others.

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While the coronavirus originated in Wuhan, China, there have been significant differences in infection and mortality rates across emerging markets as well as in the ongoing economic impact. As a result, we believe that some countries, and the businesses that operate from them, will be better placed to recover and eventually grow over time compared to others.

Several emerging countries have experienced pandemics, like SARS, MERS and Asian swine flu, so were better placed to react to the coronavirus outbreak. Countries such as China and Vietnam, with competent, unified and proactive governments, managed the situation efficiently. They benefitted from testing capacity, the ability to impose a lockdown and a willingness to utilise technology despite privacy concerns.

WHEN THE VIRUS IS UNDER CONTROLA longer-term economic impact from the coronavirus pandemic is likely to be felt by certain emerging market governments that were forced to spend more than they could afford and implement unconventional monetary experiments. For example, the Reserve Bank of India (RBI) has started its own version of operation twist, buying long-dated government bonds while simultaneously selling short-dated bonds, in a bid to reduce longer-term interest rates and stimulate the Indian economy.

We are concerned about the debt levels within countries such as Argentina, Nigeria and South Africa, as well as larger emerging market economies, like Brazil, India and Indonesia. We believe these countries will need to start bringing their budget deficits under control once the virus has run its course, a process which in the past has often led to sustained periods of sub-par growth*.

Among some of the hardest-hit equity markets during the COVID-19 pandemic have been those with high foreign ownership of domestic government bonds, such as Mexico, South Africa and Indonesia. The selling of these bonds by retreating foreign investors typically puts pressure on the domestic currency. Those countries with aggressive monetary policies before the virus hit, like Turkey and Brazil, also experienced difficult equity market conditions.

EMERGING MARKETS: ‘A RISING TIDE WILL NOT LIFT ALL BOATS’

KEY TAKEAWAYS

f A number of emerging market countries have experienced pandemics in recent years so were better placed to react to the coronavirus outbreak compared to the developed world.

f Looking ahead, countries expecting to export their way to economic development may find it difficult if protectionism is on the rise.

f Large domestic markets, such as China, may be best placed to provide longer-term investment opportunities given export markets may not be available as before.

Source: Getty Images

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COUNTRY ANALYSIS MATTERSOur view is that the next 20 years are not going to be as favourable for emerging markets as the prior 20 years. First, the golden age of globalisation has passed. Countries expecting to export their way to economic development will find it difficult if protectionism is on the rise. Second, artificial intelligence (AI) and automation are reducing the comparative advantage of cheap labour and thus making economic development based on industrialisation more difficult. Lastly, the nature of China’s growth story is changing from being commodity – and imported capital goods – intensive to one that is consumption-led, which provides less support for other emerging markets.

Therefore, we argue that there is going to be a large disparity between the success stories of certain emerging market countries and the failures of others, making country selection important.

GOVERNANCE FACTORS REMAIN CRUCIALNot all controlling shareholders in the Emerging Markets asset class oversee their company for the benefit of all – including minority shareholders like ourselves. Not all political regimes provide predictable rule of law and regulatory standards. Consequently, we remain cautious towards investing in state-owned enterprises, which can be forced to participate in ‘national service’ – a directive by the domestic government to act on its behalf. Our preference remains to invest alongside entrepreneurs who tend to run smaller and medium-sized companies, and care about the interests of all shareholders. We believe these companies represent the future of emerging markets.

A FOCUS ON LARGE DOMESTIC MARKETSWe think that countries with large domestic markets, such as China, may be best placed to provide longer-term investment opportunities given that the export markets may not be available as before. That said, we remain positive on Vietnam, which has been receiving a disproportionate share of foreign direct investment flows compared to other emerging countries. It is a logical place to diversify supply chains away from China given it has improving infrastructure along with a young and educated demographic. The only impediment is that the stock-picking pool of liquid (easily tradeable) stocks is limited.

At a company level we are also looking for businesses that are creating intellectual property, not just technology patents but also brands. Mirroring the developed world, themes such as the growth of ecommerce and the digitalisation of payments will continue to grow in stronger emerging economies. We think that successful countries and companies will need a reformist government that helps set favourable policies to pull these factors together.

EMERGING MARKETS: ‘A RISING TIDE WILL NOT LIFT ALL BOATS’ (cont.)

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There are certain key factors that we believe emerging markets need for future success:

• Large domestic market given deglobalisation

• Creation of intellectual property (technology patents and brands)

• Reformist or innovative government

Based on these factors and the dynamics likely to be at play in a post COVID-19 world, we believe ‘a rising tide will not lift all boats.’ For us, the most compelling opportunities on a longer term view are likely to come from emerging Asia where innovation is happening, and where the middle class high-spending consumer demographic is growing. What is clear, however, is that care is required when analysing the relative merits of constituents of the asset class with disparity growing between those who succeed or fail.

EMERGING MARKETS: ‘A RISING TIDE WILL NOT LIFT ALL BOATS’ (cont.)

EMERGING MARKETS: ‘A RISING TIDE WILL NOT LIFT ALL BOATS’* Sub-par growth: Growth that is at levels below average or below what is expected

Source: Janus Henderson Investors as at 31 May 2020

OUR VIEW IS THAT NOT ALL EMERGING MARKETS ARE WELL-POSITIONED

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INVESTING IN HEALTH CARE POST COVID-19

The health care sector has taken a leading role during the COVID-19 pandemic, with many investors rewarding firms working to develop treatments for the novel coronavirus or providing remote care. Thus, in March, while equities globally collapsed, the sector – though not spared from losses – outperformed most other areas of the market. We believe this momentum could continue, especially as the outbreak helps accelerate growth trends in health care and, long term, potentially improves sentiment toward the sector.

BIOTECH INNOVATION SHINESWith millions of people worldwide now diagnosed with COVID-19, the need for a treatment or vaccine has become paramount. In the past, drug discovery and development could take years, but amid the current outbreak some vaccine candidates have been able to enter clinical trials in a matter of months. This accelerated timeline is made possible by advances over the past decade in genetic sequencing, structure-based drug design and molecular research tools.

What’s more, the intense focus on finding a COVID-19 cure is helping fine-tune some of the science. Messenger ribonucleic acid (mRNA) technology, which directs the body to produce specific disease-fighting proteins, has been studied for several years, with potential applications in oncology, genetic disorders and infectious disease. No mRNA therapy has been approved for commercial use yet, but now at least two mRNA vaccines are in clinical trials for COVID-19. Large studies still need to be conducted to prove the drugs’ safety and efficacy against the novel coronavirus, but longer term, the crisis could help fast track the scientific understanding and application of this technology.

KEY TAKEAWAYS

f The COVID-19 pandemic is helping showcase innovation in biotech and may fine-tune our understanding of new drug platforms, leading to potential applications in other disease categories.

f The global need for a COVID-19 cure could improve sentiment toward the biopharma industry and lead policy makers to take a more moderate approach to future health care reform.

f Demand for telemedicine has climbed sharply, a trend that we think could persist after the pandemic. Likewise, China’s biotech industry could emerge stronger as the country competes to develop COVID-19 treatments.

Health care’s aggressive efforts to address COVID-19 could have a positive impact on the sector long term, says portfolio manager Andy Acker.

Source: Getty Images

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BIOPHARMA: SENTIMENT MAY IMPROVEThe intense effort to address COVID-19 could also improve public perception of the biopharma industry, which in recent years has drawn scrutiny because of rising drug prices and out-of-pocket costs. In April, a Harris Poll found that 40% of Americans reported having a more positive view of the industry than before the pandemic began.1 That’s not to say criticism has evaporated. When the U.S. Food and Drug Administration (FDA) granted Gilead Sciences orphan drug status for remdesivir, which has shown efficacy in treating severe cases of COVID-19, the news led to a public outcry (orphan status would give Gilead seven years of market exclusivity). Gilead quickly asked the FDA to withdraw the designation and subsequently donated 1.5 million vials of remdesivir worldwide.

We think drug makers are likely to price COVID-19 treatments to ensure access. (Gilead, for example, has signed licensing deals with five generic drug manufacturers for remdesivir and allowed each company to set its own pricing.) And going forward, policy makers could have a greater appreciation for the research and development performed by the biotech industry and try to strike a balance between affordability and the need to safeguard innovation. The net result would be more manageable health care reform – and less uncertainty for the sector.

Collaboration is also rising. Several innovative small-cap biotech firms have partnered with large biopharmaceuticals as they seek to develop COVID-19 treatments. The partnerships pair the cutting-edge technology of small caps with the manufacturing and distribution prowess of biopharma, all in the hope of bringing global relief faster. For example, German firm BioNTech is working with Chinese pharmaceutical Fosun Pharma and U.S. pharma company Pfizer to develop a mRNA-based vaccine. The vaccine, using BioNTech’s mRNA platform, is now in early clinical trials. If data are positive, Fosun and Pfizer will use their resources to help expand trials and ramp up production in China, the U.S. and Europe. Such partnerships – should they persist after the crisis – could help commercialize new therapies more quickly in the future.

INVESTING IN HEALTH CARE POST COVID-19 (cont.)

60

70

80

90

100

110

MSCI World Health Care Index™MSCI World Index™

May 2020Apr 2020Mar 2020Feb 2020Jan 2020

Inde

x Va

lue

Source: Bloomberg, as of 15 May 2020. Data rebased to 100 as of 31 December 2019.

HEALTH CARE STOCKS OUTPERFORMYear-to-date returns

19

REMOTE MEDICINE TAKES OFFSocial-distancing measures have significantly impacted access to health care. As a result, demand for elective procedures, surgeries and some forms of routine care has dropped precipitously, with the American Hospital Association estimating U.S. hospitals will lose $203 billion from March through June due to COVID-19 expenses and lost revenue.2 But on the other hand, use of telemedicine has skyrocketed, facilitated in part by reforms that make it easier for patients to access remote medicine. In Germany, the Digital Care Act, passed at the end of 2019, strengthened the use of video consultations and allowed doctors to prescribe digital health apps, with costs covered by the country’s health insurance system. Since the pandemic, telehealth use in Germany has soared, with companies such as TeleClinic reporting 60% week-over-week growth.3 In the U.S., the leading telehealth provider, Teladoc, says daily visits jumped more than 100% in early April from the month prior.4

We believe consumers are likely to continue using telemedicine after the pandemic, given the technology’s convenience and expanded reimbursement by health care systems. As for elective procedures, we believe demand has been delayed – not lost. The timeline for when procedures will resume could vary due to the pandemic’s trajectory, creating some volatility for stocks of hospitals and medical device providers. But long term, we believe these industries’ fundamentals remain intact.

CHINA’S BIOTECH INDUSTRY RISES Lastly, the pandemic has cast a spotlight on just how much the global biotech industry has grown in recent years, particularly in China. During the SARS outbreak in the early 2000s, China had few homegrown pharmaceutical or diagnostic capabilities to handle the situation on its own. Following SARS, the Chinese government launched an overhaul of the health care system aimed at improving disease surveillance and reporting, access to high-quality supplies, and epidemic prevention and control. Fast-forward to the COVID-19 breakout, and it’s a far different story. China is no longer a country that solely manufactures generic drugs and active pharmaceutical ingredients. Rather, China now possesses local talent and technological capabilities to develop novel diagnostics and engage in innovative drug discovery, with many companies now in clinical trials with potential vaccines.

19

INVESTING IN HEALTH CARE POST COVID-19 (cont.)

2020

THE RACE FOR A COVID-19 VACCINEChina’s nascent biotech industry has been one of the leaders in bringing vaccine candidates to clinical trials.

COVID-19 vaccines in Phase 1 or Phase 2 clinical trials

Drug platform Developer(s) Region

Non-replicating viral vector CanSino Biologics/Beijing Institute of Biotechnology

China

mRNA Moderna/National Institute of Allergy and Infectious Diseases

US

Inactivated virus Wuhan Institute of Biological Products/Sinopharm

China

Inactivated virus Beijing Institute of Biological Products/Sinopharm

China

Inactivated virus Sinovac Biotech China

Non-replicating viral vector University of Oxford UK

mRNA BioNTech/Fosun Pharma/Pfizer

Germany/China/US

DNA Inovio Pharmaceuticals US

Source: World Health Organization, data as of 11 May 2020.

Furthermore, we believe that post COVID-19, China’s biotech industry will emerge stronger behind an acceleration of support and resources for the industry. Healthy China 2030, China’s national health care strategy published in 2016, set ambitious goals for improving health outcomes for the Chinese population, including better access to innovative drugs. Over the past few years, we have seen interest in the China region rise dramatically from both multinational companies and innovative biotech companies. In our view, industry participants around the globe have come to the realization that the Chinese market is at an inflection point when it comes to both commercial prospects and opportunities for partnership to access the region.

INVESTING IN HEALTH CARE POST COVID-19 (cont.)

INVESTING IN HEALTH CARE POST COVID-191. https://www.fiercepharma.com/marketing/pharma-industry-reputation-jumps-during-covid-19-harris-poll-finds-positive-surge2. American Hospital Association, “Hospitals and Health Systems Face Unprecedented Financial Pressures Due to COVID-19,” May 2020.3. Gtai.de/gtai-en/invest/industries/life-sciences/digital-health-644084. teladochealth.com/newsroom/press/release/teladoc-health-previews-first-quarter-2020-results/

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