KEN BAKSH   APRIL 2021 Market Report`

 During the one-month period to 31st March, major equity markets, as measured by the aggregate FTSE All – World Index rose marginally against a background of generally more favourable COVID-19 vaccine news, “relative” political stability, and economic/corporate news releases much as expected.  Asian and technology stocks however, bucked this bullish trend falling in absolute terms.  European, including the UK, and American-excl tech equities led the advance.  The VIX index fell to a level of 19.42, a fall of nearly 15% from the year end. Government Fixed Interest stocks, especially the US 10 year, however, still shared the headlines, with further price falls, the US 10 year for instance, closing the month at a yield of 1.72%, a yield not seen since January 2020, while the UK Government All Stocks Index fell was virtually unchanged on the month but down about 8% YTD.Currency moves featured a stronger dollar, largely on more favourable economic news and higher yields. The Chinese currency weakened a little against the Greenback and is now virtually unchanged over the three-month period. Commodity prices were generally weaker, partly the stronger dollar effect, with gold for instance off 5% and 11% over the month and quarter, respectively. Oil remains approximately 25% higher since 31/12/2020 with high March price volatility (OPEC,terrorist activity, Ever Given etc)

In terms of global economic data, there have again been marginal increases to 2021 aggregate forecasts, largely driven by USA and China. Provisional 2020 figures have been broadly as expected. In its January 2021 forecast the IMF predicted that by 2022 recoveries in US and China, while adopting differing COVID tactics, will leave their economies no more than 1.5% smaller than their pre-pandemic level, while Europe and emerging markets will take longer. The World Bank produced a January forecast of 4% 2021 world economic growth, followed by the OECD estimate of 5.6% 2021 growth, published mid-March. Following the passage of Biden’s stimulus bill US estimates have increased while it seems, however, highly likely that Europe and the UK will suffer a first quarter economic decline. COVID-19 developments during the month featured firstly more progress on the approval, roll out of the key vaccines, but also the emergence of more virulent strains, vaccine “politics” and selective lockdown renewals e.g France.

The fact that the global infection rate and number of deaths (2.8 million, March 26th) continue to grow, masks huge geographical differences, themselves tiggering differing virus containment tactics, Government support and Central Bank actions. At the time of writing a “third wave” of infections and deaths is affecting parts of Europe, India, and Latin America.

One sobering thought is that, at the time of writing, just under 6 vaccine doses per 100 people worldwide have been administered. The chances of reaching global herd immunity before late next year appear small and, of course, if the virus remains rife, the risk of dangerous variants emerging is high.

The recent US Federal reserve meeting reiterated the adoption of the 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 an extended period, as well as maintaining bond purchases. The fact that the same meeting issued tentative growth forecasts of 6.3% economic growth re-ignited the overheating debate. Shorter term economic indicators include mixed trends within the labour market e.g February weak payrolls but some weather effects. Recently revised independent economic forecasts are now expecting over 6%-8% growth for 2021 with unemployment ticking down to around 4.5%. There are mixed views concerning the medium-term inflationary effect (currently 1.7%), and the course of the US 10-year yield, now at 1.72%. One measure of inflation expectations, the 10-year breakeven rate climbed to 2.36% last week, while the PCE index, the Fed’s preferred measure is expected to reach 2.2% by the end of the year. The economic debate is now shifting to Biden’s latest plan covering infrastructure, research and development, clean energy, and education ($2.25 trillion), as well as longer term tax raising measures (corporation tax, selective higher  income tax etc).

At the ECB December meeting the emergency aid programme was increased, and the 1.8 Trillion Euro loan approved. More recent ECB meetings have seen interest rates maintained at -0.5% and a continuance of the pandemic bond buying programme. Very recent European sentiment surveys have pointed to a varying economic experience across the EU area. For example, German auto manufacturers are benefitting from strong Asian demand and the country has been registering strong manufacturing PMI’s (see chart), while, on the other hand, many Mediterranean tourist resorts remain closed. Some localized lockdown measures have recent been introduced in response to “third wave” Covid concerns. The EU commission currently expects 3.8% economic growth this year. February Eurozone inflation jumped to 1.3%, higher than expected (2.0% in Germany), and many companies are likely to pass more factory gate price increases to consumers as the year progresses.

 Vaccination politics, Draghi’s initial policy initiatives, German CDU worries and Rutte’s re-election have dominated political news. 

Asia excluding Japan, led by China (across all sectors and property), remains in better shape than other major regions (virus response, economic mix). Korea for example reported just a marginal GDP decline, while positive figures were reported for Vietnam and Taiwan (just reported +3.0% GDP growth for 2020, and a 49 % increase in export orders, first two months of 2021,yoy), the latter heavily dependent on the export of electrical components/devices. 

China continues to report relatively strong economic data, showing 2020 full year economic growth of 2.3%, factory output far outstripping consumer spending. Forecasts of 5% to 7% are starting to emerge for 2021.The National People’s Congress, just ended, placed emphasis on green policies, urbanization, and scientific research, while uncharacteristically omitting reference to GDP growth projections.However,fallout from cooling US relations, domestic corporate “interference” and new sanctions (MSCI taking some stocks out of index) on top of last year’s gains may dampen equity enthusiasm going forward despite the relatively strong economic growth, and extra due diligence is warranted.

Within the UK, official GDP figures showed a 9.9% GDP decline in 2020, the worst performance in the G7, and largest UK fall for around 300 years. More recent indicators showed a not unexpected 2.9% decline in January GDP followed by a consumer uptick in February (ONS retail sales volume +2.1%)  followed by a reasonably optimistic Gfk consumer sentiment reading for early March. The Services PMI for March outpaced the Manufacturing component for the first time since the start of the pandemic as orders flowed in before the easing of the lockdown. Unemployment remains around 5% but of course heavily distorted by the furlough scheme, recently extended, in stages, to end September. In addition to lockdown effects, certain economic sectors have suffered from shortage of components e.g cars, shipping container log jam (especially meat, fruit, and vegetables), bureaucratic delays, some EU labour issues (agricultural and NHS) and Irish trade disruption, largely Brexit related. On the latter issue European trade is considerably weaker, than comparable periods even after allowing for pandemic and stock building effects.

However, although the effect Covid-19 variants and the vaccine roll out may be moving targets, economic estimates and corporate confidence are starting to rise from late spring/summer 2021 onwards.  Forward looking economic growth estimates cover a wide range,  as the positive argument of relief/catch up spending, by an element of the population from records savings (16.1% estimated by ONS for Q4 2020)  has to be balanced against rising bankruptcies,  unemployment(5.1% latest unemployment rate), greater poverty, loan repayments and the spectre of higher taxes, and certain residual Brexit negatives (e.g. trade admin, tourist travel, financial services, EU defence, pharmaceutical co-operation, airline shareholder voting structure, Scottish/Irish future…)

Inflation, running at 0.7% in February is expected to drift higher in coming months, partly the basis effect, but also utility bills, council tax, fuel prices, while the 8.5% climb in January house prices, fuelled at least partly by the temporary stamp duty relief, is widely expected to moderate.

The Chancellor’s March budget centred on the “Jobs now, tax later” theme and received relatively small market and media reactions. Several muted tax adjustments which could have affected portfolio investment were omitted while the well flagged corporation tax increase from 19% to 25% only takes effect after April 2023.

The MPC recently agreed that no more stimulus was needed now, but further QE and/or negative interest rates are being actively debated and the March meeting re-emphasised that many options were still possible.

The Treasury’s average of forecasts suggests that the economy will grow by 4.4% this year and 5.7% in 2022

 Although currently further from investor worries, growing concerns regarding global trade tensions (many), government debt (over 100% Debt/GDP), USA/China/Taiwan/Russia/Australia/Hong Kong, Middle East relations,Myanmar, BREXIT follow up and possible taper tantrums. 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 mixed performance over March 2021, the FTSE ALL World Index registering a gain of 0.84%over the month (to 30th March) in local currency and 2.2% sterling adjusted. The UK, (both broad and narrow indices), Continental Europe,S&P excl tech  outperformed, while Asia excl Japan, especially China, and the NASDAQ underperformed. The latter index las the averages year to date after being last year’s star performer as more focus has moved to value and cyclical names.  The VIX index, ending the month at 19.42, a monthly fall of 26.72%.

FTSE100-5 Year Graph-Latest XXXXXX

UK Sectors

There were mixed UK sector performances during March with mining shares and technology related weakening while utilities, some financials, and telecommunications were amongst the stronger. Since the beginning of the year, smaller company and equity income funds have outperformed the average. Mixed asset funds have shown negligible moves since the beginning of the year (. Source Trustnet 31 March 2021). 

Fixed Interest

Gilt prices were reasonably stable during the month in absolute terms and relative to the US 10 year where the yield climbed to 1.72%.  Other ten-year government yields displayed a mixed performance closing the month in Japan, 0.09%, and Germany, -0.29%. Other bonds displayed a mixed development, with more speculative grades falling in price terms, especially in emerging markets, where the iShares emerging market bond (local currency) ETF has now declined by over 10% year to date. All the followed core preference shares have significantly outperformed in capital and income terms over the year to date and are still recommended if seeking fixed interest exposure with annual yields in the 5.5%-6% area or 10.6% for the more speculative idea.

Foreign Exchange

The US dollar strengthened in March on a combination of relative vaccine progress and relative interest rate differentials. Year to date the Euro has been one of the weaker major currencies on a mixture on a mixture of political, economic, and related COVID issues, while the Yen has also been under pressure, partly a function of lower haven purchasing. Dollar Yuan has been more stable after initial strength in the Chinese currency. Adjusting for currencies, the equity markets of UK and USA finished the first quarter marginally ahead of those in Continental Europe and Japan.

Source:Caxton

Commodities

A generally weak month for commodities, especially amongst the precious and PGM groups (gold,silver,platinum and palladium).Oil was reasonably stable despite(or because!) of a number of one off events and is still up about 20% since the year end. With few exceptions, commodities rose strongly in February. The exceptions included gold, and soya. Oil, Copper, Platinum, and iron ore all registered double-figure gains over February. Brent Oil at $65.1 per barrel has shown a gain of approximately 25% since the year end.

Looking Forward 

Notwithstanding the large human toll and uncertainly still posed by Covid-19 (lockdowns, geographical variations, vaccines) there is growing optimism regarding the course of the global economy.

Central banks continue to adopt an easy money policy, supplemented by other measures while Governments provide increasing short- and long-term fiscal support.

However, both supports will inevitably be questioned/reversed as and when the pandemic eases, and investors will have to assess the impact on various asset classes. This quarter end will be particularly interest in the UK tactical fund flow perspective as passive balanced fund rebalancing meets tax year cgt tactics (several quality blue chips sitting on inviting unrealized losses) meets new ISA flows. Some interesting time spread option strategies are possible.

For equities, the two medium term 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 because 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. Since the turn of the year the rally has broadened encompassing pharmaceuticals for instance, while the Saudi move in early January has invigorated the oil and gas names, the laggards of 2020.Over coming weeks corporate results, and more importantly, accompanying statements will be scrutinised for future pointers. Related to the longer-term confidence is the increasing differentiation by tech fund managers of WFH (Working from Home) plays versus longer term themes e.g cyber security, artificial intelligence, cloud etc.

•The divergence between my high and low risk COVID stock baskets remains high as more favourable vaccine news and economic upgrades (especially USA) , have emerged. Since the 6th of November turning point, the weekend of the first significant vaccine announcement and the US election, the benchmark FTSE 100, S&P and NASDAQ have risen approximately 14%,12% and 9% respectively. Over the same period, many of the “higher risk” usual suspects, IAG, Carnival, EasyJet, Cineworld and Gym Group etc have risen by between 80% and 250% though all are still well down on 2019 high prices. However, mainstream stocks in oil and gas, banks, insurance, appear and property have also shown above average gains on the expectation of rising economic growth late 2021 (and higher rates/lower defaults/dividends in the case of the banks), joining the rally somewhat later than the more obvious COVID plays. Conversely the defensive basket continues to drift, with price declines for instance in some of the pharmaceutical,WFH and technology names.

•The last months have 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, in the longer term, but risks of bankruptcy, dilution, government interference/control should be considered. Conversely, previous” winners” must be assessed both on their relative valuation, as well as relative earnings growth in a post pandemic world. Higher bond yields will also have increasingly diverse effects on equity valuations and fund flows. On varying vaccine/lockdown developments it is possible to identify sub-trends e.g staycation versus airlines.

•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 Asia, where relative COVID success, economic GROWTH! stable FX,inward investment and   export mix are supportive.Vietnam,South Korea and Taiwan are currently favoured. The active versus passive debate in 2021, will take extra significance where “China versus the rest” and appropriate tech weighting will be important considerations. More caution is required in many South American markets with poor COVID-19 situations, deteriorating fiscal balances and inefficient governments, many of which are up for change. Parts of Central Europe are currently showing some resilience, especially when linked to German exports, but the Covid-19 situation is currently worsening in some areas. Recent events in Turkey (Central Bank Governor plus women’s rights) illustrate the sometimes-fragile balance between politics, economics and investment assets.

•Not on near term investor (or government!) worry lists but be aware of the hugegovernment DEBT problem building (tax increases sooner or later). 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!Sunak recently estimated that UK’s exposure to  a rise of 1 percentage point across all interest rates was approximately an additional £25 billion in debt service costs .  Apart from occasional bouts of term haven buying/liability matching, I expect conventional government FIXED INTEREST to continue to weaken in the medium term and would not be surprised to see the US 10 Year yield to trade towards 2.0% region sometime this year. However, other fixed interest options are available after, making appropriate allowance for risk,transparency,trading,  liquidity etc.  

•COMMODITIES- Gold has been moving sideways/downwards since August 2020, and while longer term inflationary reasons and diversification benefits may apply, the prospects for more cyclical plays continue to look bright.  Copper, which has rallied significantly about since its Marc 2020 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. Increased renewable initiatives, greater infrastructure spending as well as general growth, especially from Asia, are likely to keep selected commodities in demand and some analysts talk about another super-cycle!

•Environment is expected to appear strongly on US (Biden plan), UK (November conference), and European political agendas over coming months. There are several infrastructure/renewable investment vehicles which currently appear attractive, in my view, combining well above average yields and low market correlation with low premium to asset value. 

•COMMERCIAL PROPERTY-The most recent MSCI/IPD UK Property Index up to end of February 2021 showed a monthly total return of 0.6% across all properties (7.4% annualised),0.45% of this figure coming from income, with a slight gain in capital values.  Growth in the value of industrial assets continues to contrast with falls in office and retail. Within the retail sector, shopping centre values continued to fall (-4.9% over two months) while warehouse units were broadly unchanged. Similar trends were evident in rental growth with, for instance a 4.2% gain in Industrial rents and a 5.1% fall in retail rents (both annualised) .  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. Anecdotal evidence from the quoted property sector still shows great divergence between say Segro, collecting some 98% of its rents, and numerous retail developments, where survival in current form is sometimes in question. Pressure is afoot to revise business rates, some still tied to 2015 capital values.  Many large property funds have re-opened. My current view is that investors may wish to slowly move back to a more neutral situation for he sector with my current preference for investment trusts rather than unit trusts. 

Full asset allocation and stock selection ideas if needed for ISA (a few days left!)/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. 

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Good luck with performance! 

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

1st April 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.