Please see the below article from some of the Fund Managers at Jupiter Asset Management posted late yesterday afternoon:
The big dollar downturn?
The Federal Reserve will try to inflate debt away, and the V-shaped recovery is intact, said Mark Nash, Fund Manager, Fixed Income. The US dollar has dropped, and government bond yields have surged following the Fed’s policy shift last week at the Jackson Hole summit, where Jay Powell confirmed that the central bank was prepared to tolerate higher inflation.
What is striking, Mark said, is that global bond yields moved higher too, indicating that the dollar price action is a global reflationary booster. A weaker dollar improves the outlook for the global economy, reducing the appeal of long dated government bonds, and therefore creating steeper yield curves, he explained.
Why? In Mark’s view, it’s because the tide of liquidity has now reversed. The strong dollar was a result of the global dollar shortage, and US growth exceptionalism was linked to less cross-border lending which curtailed emerging market activity and reserve growth in those country’s central banks. This amounted to less dollar liquidity for everyone, including the Fed, and excessively tight emerging market liquidity conditions to prevent local currency weakness (notably in China, for example). This is why, as the dollar noose tightened, emerging markets underperformed and we saw the US repo funding crisis last year, said Mark.
The Fed’s quantitative tightening program made the problem worse by removing even more dollars from the system. Mark thinks they finally became aware of the error of their ways in 2020, which explains the speedy reaction to the March funding squeeze. It’s much easier to use a crisis to reverse previous mistakes than admit to them at the time!
Mark Nash
Fund Manager, Fixed Income
After Abe, is Japan ready for a taste of Suga?
Dan Carter, Fund Manager, Global spoke about the sudden resignation of Japan’s Prime Minister Shinzo Abe, who is leaving office for health reasons. The Japanese equity market fell somewhat in reaction to the news, although the greater activity has been in the production of column inches.
Dan argued that perhaps the market impact is being somewhat overplayed, reminding us that Japanese equities have seen something of an ‘anti-bubble’ in recent years, rising strongly in nominal terms while earnings multiples have stayed fairly static (due to rising corporate profitability). That hints to Dan at where the correlation/causation sits with respect to Japanese equity market performance under Abe – and it is to a greater extent more to do with correlation.
Shinzo Abe became Japanese Prime Minister (PM) for the second time in December 2012, at the end of a cycle that had seen Japan take a beating from the global financial crisis, the Fukushima nuclear incident, and the destruction of the Tōhoku earthquake/tsunami. An economic and equity market rebound from that low would have happened almost regardless of who was PM, and has been aided by the ongoing structural tightening of the labour market which has seen better allocation of capital and a greater focus on profits. Nevertheless, it is fair to say that Abe was always a pro-business leader, for example cutting corporate tax rates, and he realised that Japan needed to use its capital base better to squeeze more growth out of its maturing economy. So, although Abe’s departure cannot be seen as positive for the Japanese market, neither should it be all that great a blow, in Dan’s view.
The most important question now is who will now take over as Prime Minister. The three names in the frame are Yoshihide Suga, Shigeru Ishiba and Fumio Kishida. Kishida would be the main continuity candidate although is seen as a dull choice, while Ishiba takes a more populist approach and would be less pro-business than Abe, although he’s more popular with voters than he is with his political colleagues so the fact that this election will be held within the party works against him.
At the time of writing, however, the front runner is Suga, the current Chief Cabinet Secretary. He is very much an Abe lieutenant and so we could expect a continuation of the general thrust of Abe’s policy agenda. One key area of difference with implications for the equity market, however, is that Suga has previously been openly critical about high prices charged by the telecommunications sector. Has the strategic savviness of telcos in the last couple of years, through introducing better structured plans and additional services, done enough to address his concerns? Or would a Suga term in office lead to a tightening of regulations and a material hit to the sector’s profitability? This is a live issue for all investors in Japanese equities, particularly those like Dan who also seek a premium yield in addition to growth, and careful thought will be needed as the story develops.
Dan Carter
Fund Manager, Japanese Equities
Investors playing catch-up on gold
Despite this year’s strong rally in the price of gold, from around US$1,500 per ounce at the beginning of the year to almost US$2,000 recently, many investors are still playing catch-up, according to Ned Naylor-Leyland, Head of Gold & Silver. Many active investors remain underweight monetary metals, according to Ned, with only reluctant participation among buyers.
Among recent converts is Warren Buffett, the sage of Omaha, previously no fan of gold, but whose Berkshire Hathaway recently disclosed a sizeable, new position – valued at more than half a billion US dollars – in one of the world’s largest gold mining companies. Behind the rally in gold is the commitment of the Federal Reserve to monetary loosening, the swelling of central bank balance sheets, and the spike in government spending, fuelling distrust of the US dollar. Negative real yields mean that many US Treasury bondholders face losses in post-inflation terms, which makes gold and silver attractive as stores of true value.
The largest gains could be seen, not in monetary metals themselves, but in the shares of companies which mine them, Ned believes. Higher market prices for gold and silver have not yet been fully factored into valuations of mining equities, he argued. Ned said that the shares in silver miners are pricing in silver below US$20, well below current market prices, which have seen silver trade at more than US$28 per ounce lately.
Ned Naylor-Leyland
Head of Strategy, Gold and Silver
From reflation to Brexit: the outlook for UK midcaps
The UK small and midcap team is focused squarely on the dynamic between coronavirus newsflow, the US election in November, the reflation trade and Brexit negotiations, said Richard Watts, Head of Strategy, UK Small & Mid Cap.
This mix of events will make for an eventful fourth quarter of the year, said Richard, adding that his core expectation is a Brexit agreement that will be viewed as not too onerous for the UK. He recognizes the inherent risks in the UK-EU talks as Britain prepares for the end of the transition period at the end of the year, and he notes that the UK market and UK midcap stocks appear cheap largely because of Brexit.
In the US, Covid-19 news has been encouraging recently, with infection numbers falling meaningfully since a spike in July, while the presidential election race may be tightening, with some oddsmakers suggesting that President Trump has pulled level with challenger Joe Biden, said Richard. Trump’s re-election may benefit more traditional, value-oriented companies, he added.
The Federal Reserve’s robust support for the US economy combined with a weaker dollar underscores a reflation trade that has implications for positioning the portfolio, Richard said. He favours a ‘barbell’ approach, with technology companies and other structural winners on one side and value-oriented stocks including banks and housebuilders on the other.
UK housebuilders have struggled to gain traction this year, in contrast to the US, where the housebuilders index has touched an all-time high. The difference in performance seems to be down to Brexit, said Richard, noting the difficulty for investors in balancing the desire for more reflationary exposure with the risks and opportunities of the Brexit dynamic. The solution may be to proceed cautiously, he said.
Richard Watts
Head of Strategy, UK Small & Mid Caps
Tech bulls still charging, but elsewhere it’s a sceptical rally
Ross Teverson, Head of Strategy, Emerging Markets, made some observations from the second quarter reporting season. Generally, these fell into two categories – those from companies that are relatively unscathed by the pandemic and those that have faced major challenges.
Internet and tech names stand out among the former category, and banks are well represented in the latter camp. The leading technology and internet commerce businesses in China, some of which already dominate some of the local indices in terms of constituent weightings, posted strong numbers with sales up by around 30% year-on-year. Semiconductor and tech hardware companies have likewise performed well as the sector benefited from a following wind. These results haven’t materially altered Ross and his team’s view of the individual companies: the strategy continues to hold their preferred names in these sectors, and so far they have resisted the temptation to take profits as they see stock-specific reasons why positive change can continue to drive earnings upgrades.
Among the more challenged part of the emerging market equity universe, Ross sees no problem in making a valuation case for investing in banks, many of which are trading at or even below book value. Banks have clearly been some of the largest hit business by the Covid-19 pandemic, but aggressive provisioning in the first quarter when the pandemic first took hold is now feeding through to an improving trend for capital ratios. Ross also highlighted a Russian bank, which delayed its dividend decision earlier in the year, but has now proposed to pay a normal level of payout (indeed it is higher than last year’s).
In summary, Ross said that for those companies that have been impacted by the pandemic, there is mounting evidence that the worst is behind them, although (with the exception of the internet/tech sector as mentioned above) there is still a lot of scepticism expressed in share prices.
Ross Teverson
Head of Strategy, Emerging Markets
This article gives a good insight into what is currently going on within a range of different areas and shows the current views of the fund managers within these sectors.
Articles like this provide us with a good update and insight into the current direction of travel within the markets.
Please continue to look out for our regular blog updates.
Andrew Lloyd
04/09/2020