A lot has happened over the last month since I published my quarterly commentary. Investor sentiment has shifted from focussing on the inevitable economic recovery from the deep, mandated downturn to assessing the impact of a re-escalation of virus cases in the US, Japan and parts of Europe whilst the likes of India, Mexico and South Africa have seen continued high levels of new infections.
It would be fair to say that thus far the recovery has been better than expected in most of the world (e.g. European Retail Sales up 1.3% year-on-year in July, UK Retail Sales only down 1.6% in June, US Retail Sales nearly back at pre-COVID levels in June and both Chinese Manufacturing and Non-Manufacturing Purchasing Managers Indices above 50 in July). However, anxiety about re-escalation has cast doubt about the ongoing pace of the recovery, or indeed its sustainability if another round of regional lockdowns occurs (despite very few countries being expected to enact nationwide lockdowns).
Vaccine activity remains frenetic with all good news being quickly disseminated, however, most commentators and investors remain circumspect as to when one will actually be generally available.
The long-awaited fall in the US dollar from levels many considered too high relative to Purchasing Power Parity finally started and even the unloved British Pound fared well, although the shored-up Euro was the real star as politicians on the Continent agreed to joint debt being issued (nine to twenty years overdue some would say).
Politicians elsewhere have been busy too with anti-Chinese rhetoric and actions being ramped up by the UK and, more importantly, the US.
Investors have thus reverted to companies who are doing well in the here and now and are not interested on valuing companies on what may or may not be normal profits in the medium term or what they earned prior to COVID. The charts below highlight these points as a small number of stocks continue to outperform the market (Chart 1) and that the market is being driven upwards by excessive valuations rather than fundamentals (Chart 2).
Chart 1. The Big 3 (Apple, Amazon, Microsoft)
Chart 2. What were you thinking?
Reckitt Benckiser produced stellar results for the quarter just gone but cautioned that the second quarter next year would see a 5-6% revenue headwind whilst Netflix alerted investors that new subscriber numbers are more likely to be 2.5 million going forward rather than the 10 million produced last quarter when most of the population was stuck at home without live sport.
At the other end of the spectrum EasyJet revenues fell to a mere £7 million (versus £332million in costs), down 99% on the prior year whilst property company Hammerson collected only 16% of the rent in that was due in Q2! In July EasyJet operated 30% of its fleet with an 84% load factor while Hammerson collected a better but still unsustainably low 30% of rents.
Despite the rampant performance of tech-related shares what became increasingly clear over the month is that the technology industry is going to change very dramatically over the next few years. China and the US will have their own spheres of influence with decreasing overlap between the two whilst Continental Europe is going to attempt (from a very, very long way back) to establish some “digital sovereignty”. Taxation and regulation of the industry will also tighten although the exact forms are unknown, as is the exact timeframe. These are also likely to differ from region to region too.
Another worrying (at least for me) development is the increasing number of politically connected people who are floating the notion that the result of the US election in November will be contested and that several States will impinge upon people’s ability to vote by reducing the number of polling stations or by restricting postal ballots. It is difficult to assess what the direct impact of this will be on economies or markets but neither investors nor business leaders like uncertainty so it cannot be considered a positive. At the moment Joe Biden has, on average, an eight-point lead in the polls but commentators believe President Trump will fare better in the head to head debates so a Biden victory cannot be assured.
Investors are awaiting the details of a further $1 trillion stimulus in the US. Although it is being held up by partisan politics, it seems like another $1,200 to individuals earning less than a threshold amount (currently $99,000) will form part of the plan. Whatever the official name this is in effect ‘‘helicopter money” and surely cannot be a long-term solution.
Investors claim never to have been amidst more uncertainty. However, that feeling is borne out of the experience of the recent past rather than a rational view of the future. The future is always uncertain but if the recent past has been relatively becalmed investors expect more of the same and feel (over) confident in their predictive powers. When they have been through torrid times then confidence wanes and further torrid times are envisaged. What we can confidently say about the future is that authorities in each region of the world will throw all the fiscal and monetary firepower they can get away with at offsetting the effects of the pandemic. We can’t, alas, say to what extent there will be further global co-ordination of policy because of the geopolitical situation.
We can also assess with some degree of confidence that more is known about the virus and how to dampen its effects than was the case four months ago. This is whilst accepting that a vaccine may or may not happen and, if it does, the time of the rollout is unclear. Neither hospitalisations nor death rates have climbed in proportion to the recent increase in cases.
A fall in government bond yields, especially in the UK where record lows have been reached this week, imply that the consensus among investors is that growth will at best be very anaemic from here – in the UK we have joined Europe in the “heading for Japanification” club. This is despite vastly superior demographics for at least the next ten years both in Europe and even more so here.
Figure 1. Percentage change in markets and currencies during from 30th June to 7th August
All prices are in local currency
Activity & Positioning
The only trade we have enacted recently is selling half of the NASDAQ 100 ETF we bought in March (not all models owned it) for a combination of valuation concerns as per charts above and our fears that recent growth levels will not be maintained.
Figure 2. Portfolio changes from 30th June to 7th August – RJIS
So, there is no change to our assessment that equities will outperform other asset classes from here or that the long-term path of the US Dollar is down. Europe is a relatively safer place to invest than it was pre-debt mutualisation and so we will look for opportunities to add some further exposure there (in companies that have drivers of compounding dividend growth). Both China and the US have seen surges in retail investors and day traders of late and that is an unwelcome development that bears watching.
We are not naive enough to think the recovery will be smooth or uniform but we are convinced we have seen the bottom in economic activity and that, with ongoing fiscal and monetary support, a long recovery will ensue.
As the UK is expected to be one of the fastest growing developed economies next year after a poor 2020, we are also optimistic the UK stock market will resume the catch up it was displaying between September and December last year. For better or worse the fourth “Cliff Edge” on Brexit will be past and managements and consumers will at least know what regime they are operating in.
Chief Investment Officer
7th August 2020
Current Asset Allocation
Important Information/Risk Factors:
Past performance is not a guide to future performance and investment markets and conditions can change rapidly. Investments in equity markets will be more volatile than an investment in cash or fixed deposits. The value of your investment may go down as well as up. There is no guarantee you will get back the amount invested. If your fund invests in overseas markets, currents movements may affect both the income received and the capital value of your investment. If it invests in the shares of small companies, in emerging markets, or in a single country or sector, it may be less liquid and more volatile than a broadly diversified fund investing in developed equity markets.
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