Hello. This is Jeremy Richardson from the RBC Global Equity team. Here with another update. And it’s been a remarkable summer in global equity markets.

Headline index levels are now back to the level at which we saw prior to the pandemic. A truly remarkable achievement given all of the disruption that has happened. However if you look beneath the level of the overall index, we can see that there’s been a strong bifurcation in performance between two major groups of stocks.

Doing well on one hand, we’ve got the COVID immune businesses and these are business bubbles for whom the pandemic has—they’ve been able to stand apart from that. So things like utilities companies in particular, together with technology companies, clouds, streaming, digital, e-commerce, for whom the pandemic has arguably just accelerated some preexisting favourable structural shifts.

On the other hand doing less well, we’ve had experiential businesses who’ve had it really, really hard to try and diversify away from the impacts of the pandemic. And these would be the cinemas, restaurants, lodging, entertainment-type companies.

And this sort of bifurcation in performance has sort of become even more extended and stretched as we’ve headed through the summer. To such an extent, by the end of August we achieved the situation where Apple, just one single company, got to a US$2 trillion market capitalization. The first company to do that.

And to put that into context, it was larger than the entirety of the FTSE 100 index in the UK, and bigger too than the U.S. small cap universe. So for the first time that I can ever recall, we can talk about an individual stock actually being bigger than complete asset classes. A truly astonishing situation.

However, there have been some indications in the very short term that some of this did—the stretched performance is being challenged within the market. We’ve seen a little bit more volatility creep into some of the COVID-immune business bubbles in the very short term, but it’s too soon, perhaps, to really be able to describe this as being a rotation from one group towards the other. What we’re not seeing is as volatility picks up in the COVID immune, is that sort of weight of money heading towards the experiential businesses.

And then in the absence of that firm evidence, I think it’s probably still best to describe this as being an episode of perhaps profit taking, rather than a firm change of view. And so for investors, I think there still remains a number of things that we should sort of be conscious of and wary of in terms of sources of risk as we head now towards the end of the calendar year.

Obviously we’ve got the U.S. elections coming up in November. Those always have the potential to provide an element of surprise.

However the two big issues and which could perhaps lead to sort of a more profound change of view for the market generally, I think perhaps sort of summed up within the context of the pandemic itself and how we move through to the next stage and what that stage looks like.

Because we have the possibility of a second wave. And students of the data will be looking with concern at in the upturn of infections in some parts of the world, particularly continental Europe and some parts of Southeast Asia. And given the recovery that we’ve seen in stock prices and in profits too, is one can debate whether the prospects or the risk of the second wave is maybe built into market valuations.

The other source of potential risk, which some might actually think of more as an opportunity, could be as we get a vaccine. And if that was to be the case, then maybe the experiential business bubbles will see some of the protection that they’ve been longing for. And that could presage a shift in and a rotation within the market.

But of course we need to be careful too because, just in the same way that consumers will be returning to these experiential business bubbles, and policy makers too would also be thinking about the right approach and whether they should change things.

And I think this is being sort of exemplified within the bond market where the moment you’ve got U.S. 10-year treasury yields at around 70 basis points but inflation expectations over the same time horizon being at about 1.7, showing that real rates are very negative at the moment by about 100 basis points or so.

And arguably, if we do have a situation when we have the vaccine and things can genuinely get back to normal, then why should real interest rates be so negative for so long? And so policy makers will be under pressure to change that. And how that gets communicated, how that gets transmitted through to the marketplace is also a source of potential volatility that investors need to be concerned about.

Now as many of you will know, these are not the types of questions that we seek to be loading on in our portfolio. Instead it’s a diversified portfolio of best ideas where we can hopefully mitigate some of the volatility and effective rotation that we potentially could see within the market.

Nevertheless, such periods of volatility can cause some discomfort, so we still continue to pay very close attention to our risk models trying to ensure that the portfolio remains as well balanced as we can possibly be. And that’s by being well diversified, we actually mitigate some of these unintended exposures, allowing the value creating potential of these great businesses to really flow through to our investors.

I hope that’s been of interest and I look forward to speaking with you again next time.