IFAC's investment view January 2020
Written by Charlie Palmer on 04/01/2021

JANUARY 2021 Market Report

During one-month period to 31st December, major equity markets, as measured by the aggregate FTSE All – World Index rose, despite mixed Covid, economic and political developments. There was a shorter-term style/reversal as technology regained some relative momentum after the prior month underperformance, the NASDAQ index for example gaining 6% over the month while some of the “value” energy and financial names gave back some of the large November gains. The VIX index rose to 22.75, exhibiting quite large daily swings. Government stocks prices displayed a mixed performance by region, while other fixed interest products generally showed price gains, and issuance was unseasonably large. The Chinese Renminbi continued to strengthen, now up around 6% against the dollar since the beginning of the year. Virtually every major commodity rose in price terms during the month, the notable exception being oil.   

In terms of global economic data, there were no real changes to near term aggregate projections, the IMF and OECD currently looking for about a 4.4% decline this year to be followed by a tentative 5.5% rebound in 2021.Covid developments during December featured firstly more progress on the approval, roll out of the key vaccines, but also the emergence of more virulent strains. The fact that the global infection rate and number of deaths (1.82 million, December 31st) continue to grow quite rapidly mask huge geographical differences, themselves tiggering differing virus containment tactics, Government support and Central Bank actions.

 

At the end of August Jackson Hole monetary policy symposium, the Fed adopted a new monetary policy strategy that will be more tolerant of temporary rises in inflation, cementing expectations that the US central bank will keep interest rates at ultra-low levels for years, a stance reinforced at more recent Fed gatherings. At this time of writing, recent economic data (retail sales, unemployment) point to a softening after the strong third quarter bounce and the deteriorating Covid-19 situation, which may prompt stricter lockdowns on a state by state, do not auger well for fourth quarter growth. A pre-Christmas   $ billion 900 “stimulus” package agreed by both Republicans and Democrats offered some help to small businesses and others, although the final make-up of the House/Senate will not be known for a few days, and thus the prospects/timing of other major policy initiatives (e.g defence). The appointment of former Fed chairperson, Janet Yellen as Treasury Secretary was generally seen as a positive factor. 

At the November ECB Council meeting interest rates were left unchanged as were the amounts of the various asset repurchase programmes and the operation of the refinancing programme. However, Council members were increasingly divided about further economic stimulus against a worsening Covid-19 background and weaker inflation and at the December meeting the emergency aid programme was increased, and the 1.8 Trillion Euro loan approved. Very recent Sentiment surveys e.g the November flash PMI figures suggest,  as in the UK case, a weak fourth quarter, and many lockdowns, of varying intensity are now in place. Not surprisingly the service sector is suffering more than manufacturing, the German manufacturing PMI, for example, rising over the same period. Countries with high tourism dependency are clearly suffering disproportionately.

Asia excluding Japan, led by China (across all sectors and property), is generally in better shape than other major regions (virus response, economic mix). Korea for example expects a 2020 GDP decline of just 1.5%, while growth is expected in Vietnam. Japan, with a relatively muted Covid-19 experience, is expected to experience a relatively smooth transition under the new PM, Yoshihide Suga and experienced 5% growth in the third quarter, higher than expectations. 

China specifically has been reporting relatively strong economic data e. g provisional third quarter GDP and is likely to post positive GDP growth this year of around 2%-3%. November Industrial Production showed 7% YoY growth with exports growing over 20%. A recent government bond issue, oversubscribed, despite the tiny yield, is an example of hunger for certain Chinese assets, although the last-minute pulling of the Ant equity issue and certain corporate bond defaults, provided a reminder of some of the risks. The relatively stronger economic fundamentals have also been reflected in the strengthening currency, now up about 6% against the US dollar since the beginning of the year

Within the UK, provisional GDP figures, showed growth of 15.5% during the third quarter (after a second quarter 20% decline). More recent data showed a slowdown in October continuing into November`. A tiered approach and selective loosening over the Christmas period will not be enough to avert a fourth quarter decline overall. However, although early days until full effective roll out of recently announced vaccines, economic estimates and corporate confidence are starting to rise from spring/summer 2021 onwards. At this time of writing, the agreement, between the UK and EU on the future relationship, has been agreed by both the UK and European counterparties. With compromises all around, there is no doubt a sense of relief although some short-term disruption, and many unanswered questions e.g financial services, still need to be tackled. Although avoiding the worst of the no deal Brexit option, ongoing COVID related issues such as rising bankruptcies, short term unemployment, greater poverty, loan repayments and the spectre of higher taxes must all be considered, alongside certain residual Brexit negatives (e.g. trade admin, tourist travel, financial services, EU defence, pharmaceutical co-operation,airline shareholder voting structure, Scottish/Irish future…)

The Chancellor’s Autumn statement, full of records of an unwelcome variety, highlighted the weak economic growth (-11.3% 2020, followed by 5.5% then 6.6%), budget deficit 19% of GDP this financial year and an expectation of 2.6 million unemployed. Various support packages have been extended to March, the time of the next Budget. On a more optimistic note, the savings ratio which reached 27.4% in the second quarter, and is still much higher(17%, Q3) than the long term average, could be unleashed on “social spending” once a semblance of normality returns, according to the Resolution Foundation think tank.

Analyst’s estimates expect average global corporate earnings to decline around 17% in 2020 with a tentative rebound of over 25% next year Source (Morgan Stanley). There is exceptionally large country to country variation. Europe, including UK, is expected to underperform the US in 2020 while outperform in 2021, while Japan is one of the zones experiencing more economic and corporate resilience. This is also true in China, but also Korea and Taiwan where the combination of better COVID experience and export mix (technology, medical) is cushioning the economic blow. Reflecting the above and noting index sectoral breakdowns, dividends seem likely to fall furthest and recover most strongly in Europe.

Although currently further from investor worries, growing concerns regarding global trade tensions (many), government debt (over 100% Debt/GDP), USA/China/Russia/Australia/Hong Kong relations, BREXIT follow up, and Senate make up are not far away. It will be increasingly important to watch inflation trends, as any “shock” necessitating greater than forecast bond yields could have serious repercussions for many asset classes.

More intangible in nature, the pandemic also seems certain to amplify global inequalities (regional, medical, employment, poverty, demographic) which could manifest in growing social unrest.

Equities

Global Equities showed a gain, in aggregate over December 2020. The FTSE ALL World Index registered a gain of over 3.42% over the month and is now up over 14% since the year end, in dollar terms. The UK broad and narrow market indices rose by approximately 4% during December but have still declined by 14.3% and 12.5% respectively since the beginning of the year, underperforming the world index by around 25% in sterling adjusted terms. Emerging markets and the NASDAQ led the monthly gain, while Europe lagged the world average. Over the full year, Japanese equities led the gains amongst the major markets up by 16.0% and 18.95% in local and sterling adjusted terms, respectively. The VIX index, ending the month at 22.75, showed a monthly gain of 4.5%, even though equities in general rose during the period.


UK Sectors

Large variation was again shown between sectors during the month, the gap between the best and worst performing sectors being around 16%%. Over the full year, only one sector (mining) finished in positive territory, the worst (oil and gas) still down 49.7%. The “average” All-UK unit trust is now down about 6% year to date with smaller companies outperforming significantly (+6.5%) and income companies underperforming (-10.7%). 


1 YEAR FTSE to December31st

 




Fixed Interest

Gilt prices rose (Yields fell) 1.62% over the month, the 10-year yield now at 20 basis points (0.20%).  Other ten-year government yields displayed a mixed performance closing the month at US, 0.92%, Japan,0.02%, and Germany, -0.58%. Other credit mostly rose in price terms, whether US junk, emerging markets or mid quality UK corporates. Readers should be aware of the huge increase expected in longer maturity US debt supply in 2021. The well anticipated future change in UK price indexation will not be helpful for some defined benefit pensioners or holders of “Linkers” …but railway season ticket holders and student loans will benefit, relatively!   Check my recommendations in preference shares (note recent FCA/Aviva “apology”), corporate bonds, floating rate bonds, speculative high yield etc. A list of my top thirty income ideas from over 10 different asset classes is also available to subscribers.


Foreign Exchange

The major currency development during the month was the strength of the UK pound which rose nearly 2% against the US dollar. Amongst the major currencies only the Japanese Yen showed strength against the pound over the full year. During the twelve-month period, the US dollar weakened, especially against the Euro and Chinese renminbi, and larger moves amongst some emerging country currencies. FX moves became increasingly important for asset allocation decisions through 2020, with, for instance, approximately 500 basis points of the difference between sterling adjusted Nikkei and S&P being due to currency effects.


Commodities

With few exceptions, commodities rose in price terms during December, and, apart from oil, closed the full year with gains, in some cases significant e.g. iron ore (+73%), silver (46%) and soya (45%). Oil finished the year at  $48.45 and Brent $51.72,both about 21% below the end 2019 level,. “trading” briefly near zero during the month of April. Gold specialists have reported weaker ETF flows, to add to the generally softer Indian, Chinese and retail jewellery conditions reported earlier in the year. Maybe the other side of the trade just mentioned, but Bitcoin,reached a new recent high.

 

Looking Forward  

Over the last couple of months three major events, have reduced somewhat UK investor uncertainty going forward, and, while further detail/clarification is required on the US Election (Senate breakdown), Covid-19(new strains versus vaccine) and Brexit (the small print!), and other possible headwinds linger, there is growing optimism for the path of economies. This changing mood has and will continue to affect sentiment across all asset classes in varying ways.

For equities, the two key questions will be whether/if rising interest rates eventually cause equity derating/fund flow switches, government, corporate and household problems, and how the rate of corporate earnings growth develops after the initial snapback.

Following the format of last month, I make the following observations. 

Observations/Thoughts

  • SECTORS-The dramatic change in equity confidence, from early November, largely as a result of the Biden election victory and vaccine announcements prompted large sector/style changes with new focus on value, cyclicals expected to benefit from sharper economic growth. Conversely, a mixture of more defensive shares and technology names suffered relative weakness, and in many cases, actual price falls. Although reversing some of the strong November moves during December, the relative cyclical/value outperformance from November 6th is still apparent. In the UK case specifically, there have been other sectoral drivers arising from the 12th hour UK/Europe trade deal


  • As well as giving the FTSE 100 overall a relative boost, (FTSE 100 outperformed the S&P by about 6% since the end of October in £ terms), partially due to sector breakdown, there has been considerable sector rotation, often featuring sharp recoveries in previously neglected corners of the market. Expectations of higher demand and more controlled supply propelled the oil price higher and this fed through to previously unloved oil equities (up 26.8% over the last quarter). Note that some energy related corporate bonds have lagged the oil price recovery and look interesting. Mining stocks,the leading 2020 market sector (+14.3%), remain of interest with a growing number of underlying commodities responding to global growth impulses e.g copper and iron ore. Certain Utilities are worth revisiting for maintained, or even increased, dividend payments, stable business and growing ESG credentials, although regulation/government interference should always be considered. The Telecom sector is starting to be the subject of more global corporate activity, and both major UK names represent value plays now. Technology holdings should be maintained but be aware of some stretched valuations (priced to perfection?), tax issues, as well as non-financial developments. 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, although very recently HSBC, Santander and Standard Chartered have also hinted at restoring ordinary share dividends-a controversial topic! The Insurance sector currently offers a few higher yielding values plays Clearly a very selective approach is needed in the areas of Retail, Hospitality and Travel. The likes of IAG,Whitbread and WH Smith have all completed large rights issues, which could certainly buy time over an uncertain period.Finally,having being negative on the general sector for a considerable length of time, I am turning more neutral on the quoted Property sector, both direct equities and investment trusts. Recent results have brought out the absolute lack of homogeneity within the sector.


  • Looking at my three” home-made” stock baskets, balanced, high risk COVID-19 and low risk COVID-19 plays, in more detail, there have been significant moves since November 6th, the weekend of the first significant vaccine announcement and the US election. As the benchmark the FTSE,S&P and NASDAQ  have risen approximately 9.3%,6.3%%and 8.3% respectively between close 6th November and December 31st.Over the same period, many of the “higher risk” usual suspects,IAG,Carnival,Easyjet,Cineworld and Gym Group have risen by over 50%,though still well down on 2019 high prices.However, mainstream stocks in the area of oil and gas,banks,insurance and property have also shown well above average gains on the expectation of rising economic growth late 2021  (and higher rates/lower defaults/dividends in the case of the banks).Conversely drug companies (yes, drug companies),homeworking plays, Zoom etc have not only underperformed but actually declined in price terms!


  • The last month has shown the importance of maintaining a balanced portfolio. Many companies in the value/cyclical area seem likely to recover further, while great selectivity will be required chasing the Covid-19 risk stocks. Some of these names could recover quite strongly but risks of bankruptcy, dilution, government interference/control should be considered.Conversely,previous” winners” have to be assessed both on their relative valuation, as well as relative earnings growth in a post pandemic world.


  • Emerging Markets-Very difficult to adopt a “blanket” approach to the region with so many different COVID, commodity, debt,geo-political variables. Although the region is currently receiving large fund inflows, largely on aggregate valuation grounds, extra due diligence is required. Currencies played a major role in 2020 returns.


  • However, I continue to have a relatively favourable view on Vietnam (VOF +26% YTD), where the macro factors (COVID success, economic GROWTH!), stable FX,inward investment are positive features. Other Asian markets are also worth a look e.g South Korea, Taiwan. Russia, both bonds and equities, may appeal to value, income-oriented investors and enjoys a relatively favourable current/fiscal balance situation, although political developments can unsettle e.g mining sector tax. The active versus passive debate in 2021, will take extra significance as country selection consideration, China versus rest, and appropriate tech weighting will be important considerations.


  • Not on near term investor (or government!) worry lists but be aware of the huge government DEBT problem building. Latest figures show aggregate global debt in excess of GDP at the global level and the mantra of extremely low servicing costs, is just that! The USA specifically is aiming to increase the percentage of longer maturity issuance in 2021. Apart from short term haven buying, I expect conventional government FIXED INTEREST to suffer in the medium term. According to Citi Private Bank strategists about 80% of investment grade debt yields less than 1%, a tough starting point. However, other fixed interest options are available after, making appropriate  allowance for risk,transparency,trading,  liquidity etc.  


  • FX- The pound may be volatile over coming months on a mixture of COVID developments, relatively weak economic data, Bank of England uncertainty, political wrangling and the aftermath of the UK/Europe trade deal and related issues. The Euro may be a beneficiary or Yen for haven, lower correlation characteristics, or selective emerging market currencies for a higher risk approach. The US dollar is likely is likely to be influenced by relative COVID and economic news and of course the results of the Georgia election. China and or Switzerland may resort to currency weakening action/rhetoric. Emerging market currency moves could again have a material impact on returns in that asset class.


  • COMMODITIES- Gold appears to be moving sideways since August, but still showing a useful year to date return. While longer term inflationary reasons and diversification benefits may apply, the prospects for more cyclical plays may be more interesting now. This would explain some of the performance of some of the precious/industrial plays, silver, platinum, palladium. Copper, which has now rallied about over 60% since its March low, has benefitted from Chinese demand, “green” stimulus issues and some Covid-19 related supply issues and iron ore/coal are benefitting from a steel (especially in Asia) revival. The Bloomberg Agricultural sub-index has jumped more than a third since its low point in June, which while benefitting certain producers could have implications for local inflation and also possible unrest in certain developing countries


  • ESG Considerations-I have been reviewing several ESG (Environmental, Social and Governance) issues recently, both from personal interest, client curiosity and cognizant of the huge amounts of resource (both human and financial) being diverted to the sector. While applauding the longer-term merits of such a move, I would advise extra layers of due diligence regarding “greenwashing”, choice of benchmarks, and shorter-term considerations of values versus wallet (increasing stretch between tech and oil being a good example). It will be interesting to see how the new US leadership tackles the global environmental issues in coming months.


  • COMMERCIAL PROPERTY-The most recent MSCI/IPD UK Property Index for the eleven months to end November showed an overall year to date return of -2.0% (-6.7% from capital and +5.1% from income) compared with +2.1% total return for the whole of 2019.November was the first month when the aggregate return across all properties rose, though only “Industrials” are showing a positive return over the eleven-month period. Retail properties have lost over 16% of their value over 2020 so far, including a massive 25.7% fall in Shopping Centre prices. Continued due diligence is currently required in this sector both by asset type (direct equity, investment trust, or unit trust,) property sub-sector, and geography. On the more positive side there is growing evidence of corporate activity as predators, especially private equity or long term overseas institutional players see value. Many large property funds are re-opening, and it will be interesting to see updated cash levels, property valuations and data on investor flows. My current view is that investors may wish to slowly move back to a more neutral situation for he sector with  my preference  for investment trusts rather than unit trusts. 



Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced, adventurous, income now available online for DIY investors), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring and analysis of legacy portfolios. 

Feel free to contact    regarding any investment project.


Good luck with performance! 


Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)

Ken.baksh@ifac.eu

kenbaksh@btopenworld.com

3rd  January,2021 



Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions - investors should conduct their own comprehensive research. Please read the disclaimer. 


 

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' regulatory filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.







  

    

 


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