Log inMarket Update 22nd January 2021 from Jilly Mann
Market Update – 22nd January 2021
The arrival of 2021 was perhaps the most hotly anticipated New Year since the Millennium. Although in both cases maybe the expectations weren’t quite realistic. In 2000, the Millennium bug didn’t exterminate us all at the stroke of Midnight and in 2021, the world isn’t suddenly a less complex place. However, for the first time in what feels like ages, there are now real signs of optimism.
In this update, I will cover:
- Brexit
- COVID-19 and the impact of vaccine rollouts on stock markets
- Joe Biden and his Executive Orders
- Asia and Jack Ma’s reappearance
- Global resources
Brexit
We spent much of 2020 expecting a last-minute rush to agree the Brexit deal and true to form on the 23rd December, we received the news that an agreement had indeed been reached. Thankfully, common sense prevailed in the end and there was then little doubt that the UK Parliament would pass the Bill regardless of the bickering and contention the Deal may have generated. The backdrop of COVID-19 across Europe and the UK meant there were many more positive reasons to agree a deal than delay it any further. As the news broke, stock markets did indeed rally and through the Christmas/New Year break, there was then a general sense of optimism across the UK and European stock markets.
The changes we had made to portfolios in anticipation of a positive Brexit conclusion stood us in good stead and in the three weeks following the Deal’s announcement, our relatively new additions to the portfolios, JO Hambro UK Equity Income, Schroder Income and Franklin UK Mid Cap returned between 10.33% and 8.28% respectively.
All of the investment decisions in the portfolios at the moment are having to be made with an unprecedented short-term view in mind, it is simply not feasible to take the traditional long view when there is so much going that can impact individual stocks and markets so rapidly. With the UK, we increased our exposure ahead of the Brexit vote and we think there is more good news to come from our UK funds in the coming weeks, however, longer term, I would still anticipate us reducing our exposure at some point during 2021. Logically, the ability for Rishi Sunak to do anything radical in the March Budget seems limited by the constraints which COVID-19 will still be placing on the wider economy and so perhaps there is a period of grace before much higher taxation and Austerity 2.0 rear their heads. Nonetheless, there is a price to pay for this pandemic and it will inevitably sort the winners from the losers when the time comes. At the moment, the UK is very much a market to be selective in. I highlighted the positive performance of our UK equity funds above, but in contrast, one of the funds which has consistently been on many analyst’s best buy lists due to its historically strong performance, (Fundsmith Equity) returned minus 1.67% in the three weeks after the Brexit Deal announcement. We are now in an environment in which one must adapt, rather than hold tight and wait for it to pass.
We have deliberately tried to stay ahead of the news flow with portfolio positioning since the pandemic took hold. At times, that feels uncomfortable as we are having to take an active view on what may happen in the future, which of course may turn out to be incorrect, but the benefits of making that call early and getting it right are clear to see. As per the previous chart, if we had waited until the EU Deal had been announced to buy into those UK funds, investors would have missed out on an immediate uplift of over 4%. That is how quickly markets are turning as those stocks which thrive on certainty, be that certainty of COVID-19 or certainty of Brexit, are sitting poised to reward investors mightily when the opportunity arises. The signs remain that these funds have further to rise, in the short term at least.
COVID-19 and the impact of vaccine rollouts on stock markets
One could have been forgiven for believing markets would fear the third UK National Lockdown when Boris Johnson announced this over the festive period. As the nature of the current Lockdown is so much more reminiscent to the first one in March, than the one we experienced in November. In March 2020, when Lockdown was a novelty, stock markets responded extremely poorly to the concept and the worst of the stock market falls were experienced during that time. However, whilst it would be wrong to say that stock markets are now ignoring Lockdowns, the latest restrictions in the UK have really had a negligible impact.
In part, this may have been due to the euphoria that the Brexit saga was finally over, but predominantly because markets now feel like the end is in sight and whilst Lockdowns are economically damaging, there is an element of marking time until they will hopefully be a thing of the past. Until the vaccine approvals came in late 2020, such optimism was unfounded, but now markets are starting to shrug off the short-term pain. It is well known which sectors will struggle to recover from this pandemic and thankfully the outlandish returns we saw from airline stocks and the like in October 2020 in light of the Pfizer vaccine approval have also dissipated and we are now seeing the markets react more pragmatically than such extreme moves. I mentioned the extreme rises we saw in seemingly pro-vaccine stocks in our last update, but the chart below demonstrates this point aptly. The spike in the MSCI Airlines index in November after the Pfizer approval is clear to see, but the inevitable pullback happened shortly after as the realisation of continued travel restrictions set in and in spite of further vaccine approvals and international Lockdowns, the stock has remained relatively stable thereafter, thus pragmatically waiting for the point at which the sector can realistically start trading again with certainty.
Another point to note is the speed of vaccine rollouts. The UK has done particularly well overall in achieving “jabs in arms” as the phrase goes when compared to the rest of the globe. The US are doing reasonably well in spite of Donald Trump’s views rather than because of them and Joe Biden is targeting 100 million jabs delivered in 100 days now he has taken office. One can expect a much stronger COVID-19 policy under Joe Biden than was seen under Donald Trump, but it is worth keeping in mind that to date, the US have lagged the UK in terms of National Lockdowns. I doubt that Joe Biden wants to go down the Lockdown route, but it wouldn’t be a surprise if the US do need to take further action, potentially along the lines of more severe restrictions until they have distributed enough vaccines to bring the virus under control.
Whilst the UK market can see the end of COVID-19, in the US there is much further to go. We reduced our US weighting in December, selling fully the Baillie Gifford American fund as the short-term outlook for technology stocks in particular felt increasingly uncertain. We have maintained our exposure to the Premier Miton US Smaller Companies fund which has returned over 20% since we bought this in Autumn 2020. Interestingly, towards the end of 2020 and the start of 2021, US Smaller Companies have held up better than technology stocks and so we are comfortable that even if we do see further COVID-19 restrictions in the US, our exposure is aimed at those stocks which can still thrive in such conditions, many of which are online retailers, but which are trading at much more realistic levels and are in fact takeover prospects for the likes of Amazon, which can only be good for their prospects.
Joe Biden and his Executive Orders
As I write Joe Biden has just been sworn in as the 46th President of the United States. Stock markets over the last week have been a little muted, but one suspects that in large part the threat of unrest at the inauguration to mirror the Storming of Capitol Hill on the 6th January is lending a cautious air to proceedings. Now that the inauguration has passed peacefully, we would expect another rally in markets to ensue. Again, this will be a selective rally and one which we think will impact US markets at differing rates.
Joe Biden has already announced a raft of Executive Orders, which appear eminently sensible and, in most instances, represent a reversion to the status quo of previous Presidencies when it comes to the US position globally. Whether or not his proposed $1.9 trillion coronavirus relief plan to inject further stimulus into the US economy passes through the Senate, the intent is there to ensure that this time he doesn’t leave the negotiating table feeling short changed. Back in 2009, Biden oversaw Barack Obama’s Recovery Plan in the wake of the Global Financial Crisis, which amounted to a near $800 billion package. Hindsight suggests that had they aimed higher, then the relief effort which was eventually passed could in turn have been higher, so perhaps this time he has left himself more room to manoeuvre. Either way, President Biden has a history of operating at a time of great economic unrest and whereas Donald Trump promised much in the way of America First, the reality on the ground for infrastructure and US domestic stocks perhaps didn’t play out quite like the rhetoric. Under Biden, it seems like infrastructure projects and US firms may well be supported and so building our US Smaller Companies weighting and selective larger cap holdings will be a growing trend through our portfolios as his Presidency takes shape.
Much was made ahead of his election about how tough he may be on Silicon Valley and the technology giants, but increasingly those concerns also spread to Wall Street and US financial giants. Perhaps his coup de grace on Donald Trump will be to go after big business, which would of course directly impact Mr Trump’s business empire. At this juncture, his plans for US financials are not clear, but we have held back increasing our US weighting until some of these ideas become clearer. Logic suggests that the US must take stock, but that wasn’t the reality of the US stock market when Biden oversaw the recovery 12 years ago and we suspect that there will be some extremely strong returns to be had from the US over the coming year, but only by being in the right stocks at the right time.
Asia and Jack Ma’s reappearance
We are looking at reducing down our Japanese exposure further. Japan always seems to be an enigma. We reduced our weighting a few weeks ago as we were nervous about the Nikkei 225 (Japan’s leading stock market index) reaching all-time highs. Japan was entering unchartered territory, far away from where it has spent the last 10 years. The Nikkei 225 did then dip, but has then continued to trundle upwards. The JPM Japan fund has still achieved 20% since we bought it last year, but it is lagging the index at the moment. We feel that Asia is still a very optimistic area to be invested in for 2021, especially if the US does refocus on infrastructure projects and so we are increasing our allocation to the Fidelity Asia Pacific Opportunities fund, which has quite a different portfolio composition to the rest of our Asian and Emerging Market holdings.
At the same time, we are looking to trim a little off our Chinese exposure. There are two schools of thought over whether or not China will start to tighten its economy this Summer, i.e. pull back on stimulus measures to stop the economy overheating, or if it will let it run for longer. Any tightening that China may undertake doesn’t necessarily correlate directly to the need to exit Chinese investments, but it is something we are keeping a close eye on. The Chinese Government continues to take a hard-line approach to technology giants such as Alibaba. This stock features in our portfolios and if the Chinese authorities broaden this approach towards other technology firms, it would cause heightened stock market concerns. By trimming a little, it allows us to just manage the growth we have seen from the region and damp down some of the potential risks.
That said, the Baillie Gifford China fund has returned 42% since we purchased it last year and year to date has returned over 13%.
We expect that return to increase in the coming days with the news that Jack Ma, Alibaba’s Group Founder, has made his first public appearance since the Chinese authorities started taking regulatory action against his firm almost three months ago. Naturally, any disappearance of a key figure from public life in China causes consternation, but his reappearance has seen Alibaba shares soar again. This sums up the challenges of investing in China, the rewards can be significant, but one always has to keep an eye on the politics. Acting prematurely or taking a fixed stance on any particular piece of news flow can result in missed opportunities. It is too early to say how the Chinese authorities will react through 2021, but one supposes that perhaps they will not want to be left behind if the rest of the world, particularly the Biden regime, can stimulate growth optimism.
Global resources
Finally, I wanted to touch on global resources, as again this is an asset class we are monitoring closely. Many of the funds which we added into our portfolios in the run up to the Brexit vote have a healthy resources exposure, but we are continuing to weigh up if we need more resources in our strategies.
By resources, we don’t just mean traditional metals and oil. Joe Biden is committed to climate change innovation and so we anticipate a rally in renewable energy stocks as his Presidency takes hold. As of today, there has been some pullback in both traditional and renewable energy stocks in recent weeks, but with the UN Climate Change Conference due to take place in November in Glasgow, we expect increased focus on and incentives for the renewable energy industry. As we wend our way through the COVID-19 vaccine rollout, we expect there will be increased opportunities to redistribute assets towards this sector. Peter Harrison, Schroders CEO, recently echoed this view as he explained that Schroders have just written to all FTSE 350 companies asking them to publish detailed and fully costed transition plans on climate change. Mr Harrison believes that we are facing a 1929 moment, a once in a century shift in the way in which companies are valued, by forcing companies to value themselves based on the risk to profit of their carbon impact.
We have experienced too many supposed once in a generation events in recent times for me to go so far as to fully concur with his 1929 analogy, but the premise for changing valuation methods holds true.
Striking that balance between protecting the investments of today against the inexorable environmental factors which face us over the coming years was never more challenging than in 2020. If we reach the end of 2021 and we really are focusing on such sustainability themes rather than a global pandemic, then perhaps we would have been right to yearn the 1st January 2021 with quite so much vigour.