Cambridge Weekly Update – 17th February 2020

V-shaped recovery focus for Valentine

While investors enjoyed another upbeat week, the world’s medical profession (and the wider public at
large) remained in a more troubled state, with concerns increasing after the World Health Organisation
officially renamed this strain of the Coronavirus to Covid-19.

Last week, we wrote how capital markets had recovered from the late January sell-off, seemingly
unconcerned that pandemic avoidance may devastate the global economy more than the illness itself. This
theme continued this week, despite the count of infections and deaths jumping up after the Chinese
authorities adjusted their detection method to a more realistic, if slightly less scientific approach.

Lagarde, the presidential ECB President

Modern-day central bankers are just as much politicians and PR managers as they are technocrats. With
constant media attention, every word from officials’ mouths is dissected and analysed by those trying to
find out which way monetary policy will go. For the modern central banker, playing the game – not only
with markets but with elected officials – is essential.

Former European Central Bank (ECB) head Mario Draghi was widely considered by capital markets as a
competent and credible force. But he was not widely regarded as the most presidential of presidents by
Europe’s political establishment. His tenure certainly had its dramatic moments – like the “whatever it
takes” speech that effectively rescued the Eurozone from crisis. Nobel laureate economist Paul Krugman
even called him “the greatest central banker of modern times”. But escaping the stigma of grey technocrat
was always difficult for Draghi. This is not so surprising, considering his CV took him from private banking
to regulatory boards to the Bank of Italy and finally to the ECB. It was a career that definitely put the
‘banker’ in central banker.

Growth or Value – Take Your Pick

Equity investors often deliberate over which “factor” strategy to choose from. Should you pick companies
that are good “growth” stocks or “value” stocks? Do you pick “size”, “momentum”, “quality” or lowvolatility”?

Such factors are observations about companies’ financial metrics (generally, relative to their share price)
rather than about their business line (their “sector”). Companies usually display the characteristics of more
than one “factor”. We won’t go through all of them here, but it’s worth exploring the two factors that are
most complementary.

Growth stocks – as the name suggests – are companies expected to produce better-than-average
sustainable growth in earnings. As such, their share price tends to be high relative to their current earnings.
It’s the earnings in five years’ time that matter.

Read the full commentary here