Market Update 22nd September 2020 From Jilly Mann
In this update we cover the following:
– Economic & Geopolitical Concerns
– Plan B and Plan C
– Global Lockdowns Phase 2
– Property and Global Recovery Sells
– The US, Technology and Japan as a Buying Opportunity
– Outlook for Equities and Portfolios
Economic & Geopolitical Concerns
After a period of relative calm in global stock markets, we have hit upon uncertainty politically and medically. In effect we appear to have a maelstrom of Brexit, US Presidential Elections and Covid 19 all stirred up together, before we even consider the ongoing US/China trade dispute.
Plan B and Plan C
In terms of portfolios, I have mentioned before that we have a Plan B ready to implement if we see consistent market worries, but to hopefully reassure you further, we also have a Plan C. Plan B is a rebalancing of portfolios to lower risk assets, such as Government Bonds and Treasury stock, a strategy not dissimilar to that which we introduced in March 2020 when Covid 19 lockdowns really hurt stock markets for the first time.
Plan C is a sell down to cash of various holdings, to protect valuations with a view to reinvesting once the opportunity arises. The reason Plan C looks like a stronger option than Plan B at the moment is simply because bond markets aren’t offering up the same opportunity for returns that we saw earlier in the year.
In March 2020, moving predominantly into bonds at short notice meant that we could combine capital preservation with some capital upside. Conditions have since changed and the bond market has been relatively benign over the last month. Whilst equity markets have reset to some extent, bonds have remained relatively unchanged in spite of market sentiment. If they remain relatively benign, they may well preserve capital better than equity, but the tactical upside we benefitted from before may not be there to any great extent and so perhaps holding more in cash in the short term provides us with greater flexibility to buy back in to the market with less concern over selling down bond holdings to do so.
We haven’t yet pressed the button on either Plan B or Plan C, but we have inched much closer to needing to take such action over the last week.
We think it is still too early to predict the demise of equities in the same way we saw in March 2020. For us to make a decision to sell down and wait to pounce back in requires the reality of a Second Wave to be much stronger than it is at the moment. So we are ready to act, but being premature on a decision and missing out on an immediate rebound is as much a threat as being patient to see how news flow develops.
Global Lockdowns Phase 2
All of the focus is on the UK at the moment, but infection rates have been rising across Europe as well. Stock markets do not like the prospect of further national lockdowns and for business, they should be avoided wherever possible. If second wholesale lockdowns take effect, then the confidence which buyers will have in stock markets in the future will be significantly lower and that confidence is unlikely to return beyond Covid for some time to come. Global markets have tried to shake off the First Wave and many areas have recovered strongly, but this is unlikely to happen on repeat, because each time an economy is stopped, there will be more companies who can’t recover and we will see worsening recessions as result. There will be a few winners inevitably, but confidence and a belief that buying back into stocks will provide any sort of longer term return is hugely undermined by over-zealous lockdown threats.
That is not to diminish the human threat of the disease in any way, but as investors we have to separate out the medical consequences from market consequences. Prospects for a vaccine have seemingly diminished and, even if one is found, it has to be tested to the hilt to protect against litigation and it has to be produced in previously unseen quantities. Anyone waiting for a flu jab at the moment will understand the logistical issues health services face to roll out a fairly common vaccine and so after earlier optimism, we need to perhaps be more sanguine about when or indeed if a vaccine will ride to the rescue.
I write this before Boris Johnson makes his next announcement to the nation, but it does feel like we are back in a fast paced vehicle with data and news requiring us to make swift decisions on portfolios as the situation develops.
Property and Global Recovery Sells
In terms of changes we are making to portfolios at the moment, we have taken, in our view, a sensible decision to sell out of the remaining BMO Property Growth & Income fund, reallocating this to our existing Fixed Interest holdings. This may seem odd in lieu of my comments on bonds as an attractive proposition for Plan B above, but there is a difference in topping up an existing holding which is doing well and converting whole portfolios into bonds. By selling the BMO fund now, we avoid the risk of being caught in an asset where the prospects for rental default and void periods will likely rise with the prospect of further lockdown measures. We are simply keeping portfolios more liquid by making this change now.
We are also selling the Schroder Global Recovery fund and switching this into America (predominantly into technology focused stocks) and Japan. The Global Recovery fund is poised to do well in an environment where greater certainty returns to markets and where banks and those assets which have been worst hit start to recover. We weren’t too far away from this point a few weeks ago and the fund at times held up well, but with renewed global uncertainty which looks poised to stay around for the foreseeable future, it makes sense to use this allocation in areas we have greater conviction over than hang on at a time where we just can’t see enough reasons for a rotation to recovery stocks coming through imminently.
The US, Technology and Japan as a Buying Opportunity
Investing further into America at the moment is slightly contrarian in the sense that US stock markets have experienced a tough month. Technology stocks had fallen off to some extent and the broader US market also suffered some of its worst consecutive weeks for quite some time. Much noise has been made of late about the demise of technology, that technology stocks which have led global stock markets out of Covid’s First Wave and prior to that had propped up the US economy over recent years were finally getting their comeuppance. That said, when the fears over a Second Wave reached a peak with the UK and European markets down 3-4% for the day, the US NASDAQ index (the primary technology index) was virtually flat. I wouldn’t say that technology stocks are the new defensive stocks forever, but without technology right now, the world starts to grind to a halt and so they do have a role to play even at expensive valuations.
All things being equal, with the fluctuating Presidential Election campaigns in the US together with continued social unrest, I wouldn’t ordinarily feel that the US was the place to increase allocation to at this time. However, I do think that we need to be cognisant of what has gone before us with Covid 19 especially and look at the drop which the US and technology stocks have seen in recent weeks as an opportunity to buy into those very same assets which helped drag the global economy from the depths in March 2020. This may not be a long term move. The outcome of the US Presidential Election may well result in us having to take some further big decisions on maintaining our US investment position in due course, but for now I suspect that a refocus on Covid and the US stock market will only help Donald Trump’s position as he tries to regain traction in the polls and so I would expect him to do whatever he can to push decisions through that result in the US looking like the global leading light for economic recovery again. As to which way the Election will go, it is too close to call, but I think it increasingly likely to be a messy results process. I struggle to see any result being called without a challenge by the opposition if voting conditions rely on social distancing, an absent electorate or a creaking postal vote system. Right now, we feel additional US and technology is as positive a place to invest as any, but expect this to be a changing view as time passes.
With regard to Japan, the JPM fund is up 5.5% over the last month alone. The Nikkei 225 (Japan’s leading stock index) was up during the worst of the recent market volatility compared to virtually all other leading markets which took a hit. Japan has seemingly shrugged of President Abe’s unexpected resignation and finally the measures he took to boost industry and the economy seem to be paying off. Again, looking at what happened in March 2020, Japan was one of the leading economies in terms of actually being positively affected by the actions taken in the country to fend off Covid 19. There are few reasons to predict a different response this time around.
In terms of Brexit, whilst the UK is completing deals with other foreign nations, Japan notably amongst them, it remains difficult to see a Brexit trade deal with the EU being achieved in the light of Covid 19 requiring so much resource and attention. By selling the Schroder Global Recovery fund we are reducing our UK exposure a little, but we maintain our other UK holdings and European funds for now. The Baillie Gifford European fund, which we introduced to growth portfolios in July, is up over 4.5% during the last month and so there continues to be growth returns available in Europe. Again though, if we see increased tension in Europe, either over Brexit or a united response to a Second Wave by way of mass economic shutdowns, we are ready to sell down and protect portfolios.
Outlook for Equities and Portfolios
We aren’t making wholesale changes as it stands, but both Plan B and Plan C are waiting if we need to employ them. That we don’t feel we need to do that yet, should reassure investors that we aren’t in the mass valuation write off period which we experienced a few months ago. So much of the news is now factored into stock markets globally and in turn logic suggests certain sectors remain un-investable under Covid conditions, certainly it would be a brave call to back global travel stocks or airlines at the moment. They took a major hit this week, but the question remains whether one should be holding them in the first place at the moment and so we are deliberately trying to avoid certain areas and being bold by backing quite punchy investment funds where we have conviction.
We think that equities will remain the most attractive asset class for the foreseeable future. If we believe that, as we do, then we need to invest in those funds who we think are best placed to benefit from growth, now doesn’t feel like the time to back middle of the road investment strategies. Far from that being a play it safe approach, we think investors could be caught out by so doing. High conviction and a logical view over how we are all likely to have to live over the next few months is the approach we feel will still serve investor portfolios well. We are looking at this every day though, so please be reassured that if the time comes, we will be equally bold in changing tack and trying to protect your portfolios.
I cannot avoid the raft of market concerns that abound at the moment to make this a wholly positive update, but this isn’t March 2020 again, at least not yet. If the politicians can find a way to balance the inevitable increase in positive diagnoses arising from increased testing with the need to keep the global economy open, I think stock markets will muddle through the next few weeks before finding some sense of equilibrium between the winners and the losers. If they don’t find that balance, the outcome for markets could be wholly different, but one thing we have learned about trying to run a business through Covid, is never to plan too far ahead and always expect to have to change course the next day. Not an ideal way to operate, but for now, however uncomfortable and unnatural it may feel, it is the best option we have.