Log inMarket Update 27th November 2020 from Jilly Mann
It has been a few weeks since our last update and a lot has happened in that time. We have had the US Presidential Election, a Brexit stalling and vaccine hysteria. We have been very busy over the last few weeks positioning the portfolios for the ever-changing outlook and so I will summarise our thinking below.
- Pfizer’s Covid 19 vaccination announcement
- UK Equity allocation
- Brexit
- US Presidential election
- Technology & US Equities
- China & Japan
Pfizer’s Covid 19 vaccination announcement
Monday 9th November 2020 for many was seemingly the day the world changed. Pfizer announced that their Covid vaccine was 90% effective against the virus and we lurched unexpectedly closer to the world returning to “normal”, or so the narrative went. It was always expected that whenever a viable vaccine option was found that markets would respond extremely positively, the problem was that nobody knew when that moment would come. What happened on the 9th November was as polarised a market as has been seen in living memory.
The font on the graph above may be quite small, but the direction of the lines says it all. Watching the market response to the Pfizer announcement could be summed up relatively simply. Apparently the advent of a vaccine meant that nobody would order another takeaway, nor would they shop online, bet online or need precious metals as a safe haven. Instead, everyone was going to go on holiday, buy a house and live a life of unrestrained luxury.
The example stocks shown above demonstrate this as well as any chart I have seen. Carnival shares were up nearly 38% in one day, Airlines were up over 25% in a day, Rolls Royce over 43% in one day. By anyone’s estimation those rises felt extreme, not least because undoubtedly a successful vaccine does open up the world economy and travel options again, but not immediately. The reality for those businesses is that they remain largely dormant until the vaccine is distributed and in use, potentially not until Spring 2021 globally, and so we saw a huge reaction built on relief and future hope, but not necessarily one which signalled the death knell of all of those newly termed “Covid stocks” which had done so well throughout 2020, but were now all deemed surplus to requirements.
I know some investors wondered why portfolios didn’t immediately reflect this surge in global markets and there are two reasons for that. The technical reason is in part due to the way investment funds are priced. Some funds price in the middle of a day, some towards the end of the day and by so doing, you don’t always see performance pull through into fund performance immediately, there can often be a lag. Secondly, we weren’t specifically holding a portfolio of stocks that were solely deemed to be pro-vaccine winners. Firstly, because some of the stocks which soared continue to have structural issues which makes us wary of buying them with or without a vaccine. Secondly because the timing of a vaccine was unknown and so to sit in beaten up holdings waiting for a vaccine to appear could have cost investors vital returns through 2020.
Since Pfizer’s announcement, we have seen Moderna launch their successful version and the Oxford effort is also now seemingly within reach. Interestingly, the market hasn’t reacted anyway near as strongly to subsequent vaccine announcements. As we suspected, the reality of how to store, distribute and actually vaccinate the global population is now looming large and perhaps the ability to store a vaccine at minus 80 degrees Celsius isn’t going to be quite as easy as the euphoria made it seem.
That is not to be cynical, we are in a much better position with Covid than we were a month ago and that will undoubtedly be positive for investment markets. We have made a number of changes to our portfolios of late that have helped capture some of the immediate upside we saw from the Pfizer announcement and we have made subsequent changes as well to further position ourselves for a continued rotation of stocks from pre-vaccine winners to post-vaccine winners, if they can be designated as such.
UK Equity allocation
Ahead of the Pfizer announcement we had already added the Franklin Mutual UK Mid Cap fund into portfolios. In large part we did this to further expose portfolios to UK assets ahead of any Brexit deal, but mid cap stocks performed strongly post Pfizer and this fund has returned 9% since we added it at the end of October.
Subsequently, we have added further UK exposure by way of the JO Hambro UK Equity Income fund and latterly the Schroder Income fund. These two funds were staple holdings pre Covid, but fell out of favour as the virus wiped out any potential rotation in the UK stock market away from stellar growth stocks which had performed so well for so long, to those less loved value stocks which had been beaten up for so long through the Brexit impasse. In the wake of Pfizer, many commentators signalled the complete rotation from growth to value was immediate and everyone needed to sell all growth stocks and just own value. That in itself was quite a turnaround from the negativity which has haunted value investing for so long and whilst we knew we needed to increase our value exposure in the wake of more positive prospects, we didn’t and still don’t feel we are yet at the point where selling all growth assets and backing value completely is the right thing to do.
To give an example, the JO Hambro fund has returned over 7% since we bought it earlier in November, the Schroder fund is also up around 3% since we bought it, but the Threadneedle UK Smaller Companies fund which we have owned ongoing has also returned 7% since the end of October. Therein lies our argument, that we do feel there is now an outstanding opportunity to benefit from a recovery in value assets via Hambro and Schroder, but those UK growth funds such as Franklin and Threadneedle still continue to perform so well that we have adopted a balanced approach for now.
Brexit
We are constantly reviewing this approach and we may tweak it further as news changes, but, aside from the vaccine, Brexit still needs to be sorted out. It felt like both parties were inching that much closer to an agreement earlier in the month, but then face to face negotiations had to halt again at an impromptu point with Lockdown round two spreading across Europe. That said, we don’t believe this latest hurdle will have too much impact on a deal or otherwise, as most of 2020 has already been spent trying to negotiate in spite of Covid restrictions and crucially there still seems to be a need on both sides to come up with a viable agreement. If we do see that come through, we would hope that our UK equity allocation will benefit from a double bounce through the vaccine announcements and a Brexit agreement. Rishi Sunak has clearly laid out the economic problems facing the UK post Covid until 2022 and beyond, but none of that information was really a surprise. Whilst we remain in this limbo situation, we feel that our bolstered UK allocation should give us an opportunity to benefit from some further good news in the near term, but I wouldn’t be surprised to see our UK allocation reduce back down in the New Year, if not before, as the post Covid world perhaps doesn’t appear to be quite as euphoric as markets initially felt.
US Presidential election
In terms of the US, the Presidential Election went largely as predicted. Whilst perhaps the final result wasn’t as close as it might have been, reaching that point wasn’t straightforward and the process continues to drag on. In the US system, a change of President often means a hiatus in anything actually changing and we are seeing that with President Trump dragging his heels over a concession and Joe Biden rather hamstrung in the interim. As a result of this and changing prospects for the US economy, we have altered our US allocation to reduce the Baillie Gifford American allocation and include the Miton US Smaller Companies fund alongside it.
Technology & US Equities
Baillie Gifford has a large technology bias within the fund, which has helped it produce the stellar outperformance it has managed in recent times, but the threat of technology stocks being overvalued continues and in the wake of the vaccine announcements, growth-driven technology stocks may be overtaken in the short term by the similar rotation we are seeing in UK markets. Technology stocks did take a hit immediately that the Pfizer announcement came out, but they have largely recovered their ground since then. Again, a further indication that a blend of holdings is sensible at the moment and that the story of pre-vaccine or post-vaccine stocks to own isn’t quite so clear cut. I have written at length about Tesla in the past, but we are now in the immediate run up to Tesla listing on the S&P 500 stock exchange, the US’ blue-riband stock exchange. This promotion happens in December and so we wanted to hold onto both Baillie Gifford and therein the Tesla allocation until any rally in the stock ahead of the stock market promotion had come through.
The chart above shows the performance of Tesla Inc since the Pfizer announcement. After an initial dip, the upward trajectory of nigh on 35% subsequently is hard to ignore. We do not think this performance will or can continue indefinitely, despite recent announcements over the end of diesel and petrol cars, but we didn’t want to sell out of all technology assets in the wake of just the vaccine announcement, when we believe there are both stock specific and global economic reasons to maintain some exposure to these assets and when we expected them to recover sharply from the initial dip.
The inclusion of the Miton US Smaller Companies fund is one we have been considering for a while, but the managers of this fund are very open as to when it is a good time to consider investing into US small cap and when isn’t. When we met the managers back in 2018, they were clear that then was not a good time to buy US small cap, but with a shift in political regime and an improving backdrop post Covid, we were keen to buy in relatively early. The managers themselves are now championing this fund as one which should start to outperform in advance of the US economy pulling away from recessionary territory. We have started to build an allocation which has thus far returned 6% since mid-November and our expectation is that we will build this allocation further in the months ahead.
China & Japan
A brief word on China and Japan. We have reduced our JPM Japan exposure in the wake of the Nikkei 225 (Japan’s primary stock market) reaching all time highs. We have maintained some allocation as we do think that Japan is well placed economically to thrive, but Japan has a habit of flattering to deceive and so we want to just take stock and utilise some of the Japanese equity allocation we have released into UK and global value assets for now. If Japan can maintain it’s positive outlook with the Nikkei 225 continuing to trend upwards, we can look to rebuild our allocation in the future.
China has been one area we have watched really closely of late with the Chinese Government announcing increased regulatory measures on Chinese technology companies. This fed through to the stock market with some stocks seeing an immediate downturn. However, the tone has changed in recent days with Alibaba offering a more conciliatory response to the news, suggesting that this regulatory intervention is “timely and necessary”. This story has much further to run, but in terms of our holdings, the Baillie Gifford fund has already recovered much of the initial downturn it experienced and the First Sentier Greater China fund has hardly been affected at all. The funds are up 2.5% and 4.5% since the end of October, but it is a situation we remain alert to in case the conciliation doesn’t continue.
I seem to have majored on the UK, US and Asia in this update, but global events have largely impacted those areas of our portfolios the most in recent months. Whilst we remain cautious longer term for Western economies in particular, we are relatively optimistic for the remainder of 2020. It seems odd to look forward with such short termism, but we need to continue in that vein for a little while longer, until hopefully 2021 offers a little more certainty to us all.