AUGUST 2020 Market Report

Equities

• SECTORS-Pharma has been one of the consistently stronger sectors this year and although the COVID test/vaccine product news highlights certain producers, the strong balance sheets and defensive product portfolios seem likely to keep the whole sector of interest. Note that some energy related corporate bonds have lagged the oil price recovery and look interesting for income and capital gains. Mining stocks may also be of interest with a growing number of underlying commodities responding to global growth impulses while precious metals are also seeing strong interest. In the more defensive market environment, which I expect, certain utilities are worth revisiting for maintained, or even increased, dividend payments, stable business and growing ESG credentials, although regulation/government interference should be considered. Technology holdings should be maintained but be aware of some stretched valuations, tax issues as well as non-financial developments e.g Facebook,Twitter. Much of the banking sector specific i.e. ultra-low interest rates, dividend deferrals, debt provisioning and   stock specific e.g HSBC news, now seems priced in, with many bank names trading well below book value, although domestic banks e.g Lloyds will remain strongly associated with UK COVID developments. In many cases bank preference shares offer higher yields and better capital security now. Clearly a very selective approach is needed in the area of retail, hospitality and travel.
•  I have identified certain COVID specific equity plays, both loser and beneficiaries, several which are intuitive, and their respective performance does mirror the certain risk on/risk off moods exhibited by the markets. However extra due diligence is required at stock level as immediate cash flow/balance sheet/government intervention issues have to be considered in the short term, as well as the fact that some sectors will face irreversible longer term changes, even once the Covid virus disappears. Over the last month, there has definitely been more relative  interest in the more defensive plays, now showing a loss of “just” 10% since the high and a bounce of 45% since the March low…compared with -57% and +21% for the higher risk names.
  
• Emerging Markets-Very difficult to adopt a “blanket” approach to the region with so many different COVID, commodity, debt,geo-political variables.Much of Latin America is experiencing an acceleration in COVID cases, as is India, while closer to home Turkey faces a worsening currency situation  However I have a relatively favourable view on Vietnam where the macro factors (COVID success, economic GROWTH!), stable FX,inward investment are positive features.Russia,both bonds and equities, may appeal to value, income oriented investors and actually enjoys a relatively favourable current/fiscal balance situation Please contact for my favoured pooled investment play.
  
• Not on near term investor (or government!) worry lists but be aware of the huge government DEBT problem building. Latest figures show aggregate debt in excess of GDP at the global level. Apart from short term haven buying, I expect conventional government FIXED INTEREST to suffer in the long term, but other fixed interest options are available.  Within the UK gilts sector, it should be noted that increased supply is occurring at the same time as reduced monthly QE buying. Beware using ETF for certain corporate debts, and even certain OEIC’s.
  
• FX- The major development during July was the weakness in the US dollar, partly on relative interest rates, partly relative virus developments and partly ongoing political tensions. The Euro was one of the major gainers rising from   $1.123 to $1.183
  
• COMMODITIES-Gold remains in positive territory, although there are very mixed views on inflation. There are growing signs that gold jewellery demand has been falling quite sharply I.e recent price rise fuelled almost entirely by investment flows. In several varying areas, supply demand distortions are creating very volatile conditions e.g WTI oil, uranium, palladium, coal. In a UK context it might be worth remembering that plantings and pickings will be disrupted by both weather and labour shortages, which could potentially lead to pockets of food inflation.
  
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• COMMERCIAL PROPERTY…The last few weeks have seen news from the commercial property sector (Intu woes,Land Securities, British Land,TR Property, etc),and the key takeaways seem to be very much as anticipated i.e. Further large write downs and weak rent collection in most things retail (excl food retail), steadier but fragile London offices, and strong developments in the areas of logistics, healthcare and storage. European statistics are generally more favourable than UK. Student accommodation, a former investment favourite, is taking a hit from both domestic and international demand. Extra due diligence is currently required in this sector both by asset type (direct equity, investment trust, or unit trust (although most of these locked in now!).Many property funds are continuing to charge fees, despite being in “frozen” mode, another source of investor angst. The FCA is also looking into Councils who have been active in the sector (horses…bolting etc).Expect some embarrassing news here!
  
• HEDGING. Lower volatility may make certain hedging strategies more affordable