In the short term the outlook for stocks (and pretty much everything else) depends on the evolution of COVID, and how governments, households and businesses respond to it. These are big unknowns.

Activity is down since the beginning of the year and unemployment is up. The timeliest indicators of UK demand have for now stabilised at very low levels. This has caused firms to cut investment, reduce working hours and, in some cases, lay off workers.

It’s a risky backdrop for investors.

There are big opportunities for contrarians with an informational edge, but for many others the best course of action might be to build a robust portfolio of strong, quality companies bought at reasonable prices.

In amongst the uncertainty there are pockets of the economy that are safe and even stand to benefit. Identifying these industry groups and then looking through some of the highest quality candidates with the strongest momentum might lead us to companies that are well placed to continue growing.

Life after lockdown

We can’t get excited about a return to normality anytime soon, but as the saying goes: this too shall pass. In amongst all the grim headlines there are some green shoots.

Risky asset prices have picked up from their lows in mid-March. There are tentative signs of recovery in domestic spending in China. This is likely to be echoed in other countries that have started to relax Covid-related restrictions on economic activity.

The outbreak of Covid-19 began in China, with Wuhan and other cities entering lockdown on 23 January. Now, restrictions are easing and economic activity is resuming. High-frequency indicators such as energy consumption and road traffic suggest that activity is at almost 90% of normal levels. Industrial production had already recovered in March and was only 1% lower than a year earlier.

Retail sales remain weak (around 16% down on the previous year), so perhaps consumer spending is slower to recover. In South Korea, which also experienced the outbreak early, internet searches for restaurants are still well below their level a year ago despite the fact most businesses are open.

Working assumptions

My working assumptions are highly conditional and subject to change. The bulk of my portfolio does not depend upon these assumptions being correct. I am looking for stocks that can survive lockdowns of various length and severity. That said, having some thoughts on how things…

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