Please see the below update from a few of the fund managers at Jupiter posted late yesterday afternoon:
Would another market slump be the time to turn bullish?
It was only relatively recently that share prices of the high-profile US technology stocks, known as the ‘FAANGs’, were going parabolic. That’s not a good sign because it usually doesn’t end well, said Richard Buxton, Head of Strategy, UK Alpha. Indeed, the last couple of weeks have seen a notable pullback in those stocks. It’s the sort of move that makes the chartists get very excited and talk about prices returning to ‘key support levels’, he said.
Richard finds it very interesting that this setback has happened at a time when the Federal Reserve (Fed) has been very vocal in its commitment to prioritise employment over inflation targeting, and has said interest rates should be expected to stay on the floor until 2023 at least. And yet, he highlighted, the one thing the Fed hasn’t done is further expand its balance sheet. The next six weeks will be interesting in the run up to the US election, after which a lot will naturally depend on who will be inaugurated as President in January.
In the UK, the government are determined to both halt the continued spread of Covid-19 and keep the wheels of the economy turning. Whether such an outcome is achievable remains to be seen, but the new direction involves selectively re-applying some of the restrictions seen during lockdown, including a tightening up of rules for restaurants, pubs and bars.
Travel and leisure stocks would be among the losers from a return to some of the lockdown restrictions, and their share prices have been hit as a result. In Richard’s view, in times of crisis it is often the second plumbing of the depths that provides investors with an opportunity to become an aggressive buyer, as others capitulate and despair of there ever being a turnaround in fortunes. In this instance, Richard points out that the world is by definition six months closer to a vaccine now than when the pandemic first took hold around the world, so he would say this is not the time to abandon all hope for travel and leisure stocks. That said, he isn’t particularly bullish on the sector either and for example has elected not to take part in a rights issue for an airline group held as a small position in his strategy. For Richard, this is a time to assess company results as they are announced, take another close look at the balance sheets and cash burn, and decide which stocks will be able to survive through to at least the spring.
Richard Buxton – Head of Strategy, UK Alpha
Are there storms brewing in high yield markets?
High yield bond markets have experienced strong new issuance, although some struggling sectors are seeing a few deals pulled, said Leon Wei, Credit Analyst, Fixed Income. In the US, total new issuance is around $340bn which is 70% higher year-on-year. In Leon’s view, it’s clear that issuers are taking advantage of the fact that yields in the US high market are not far from their pre-Covid heights.
However, some of the more challenged sectors within high yield, and even investment grade, have lately had more trouble arise in completing deals. Leon highlighted the recent example of a German office and retail real estate business that tried to price a BBB bond a few weeks ago, but the deal got pulled partly because of the poor market perception of commercial real estate.
In the energy markets, he noted that the rally in high yield energy has gone slightly ahead of both the oil price and energy equities. This is despite the fact that credit fundamentals in the sector still remain relatively fragile. For example, according to Moody’s, five out of the ten high yield companies which have defaulted in August were in the energy sector. In the strategy, Leon says the team are focused on high quality energy credits and, apart from some short-dated yield-to-call special situations, they have not added to their exposure for some time.
Leon Wei – Credit Analyst, Fixed Income
Defensive sectors hit in emerging market sell-off
Emerging market equities had a strong start to the month, but month-to-date gains were wiped out by the wide market sell-off earlier this week, said Colin Croft, Fund Manager, Emerging Markets. Predictably, some of the worst impacted sectors included banks and commodities, as well as countries like Turkey, which are dependent on external funding.
What is more, some of the defensive sectors in emerging markets (EM) that previously held up well in previous bouts of volatility also got hit hard this time round (e.g. gold miners, computer game producers and convenience stores). Valuations in some of these areas were starting to look quite stretched, so Colin said this could be partly down to profit-taking. In addition, some of these names had been attracting lots of retail money, and retail investors may have been spooked by the headlines about the ‘second wave’ of Covid-19 and the greater restrictions that were being introduced in Europe.
In terms of commodities, oil prices were the worst impacted, partly on news of the imminent resumption of Libyan oil exports. Currently, Libya is only pumping 90,000 barrels a day (bpd) , but Colin said this could ramp up to 500,000 bpd by year-end and 1m bpd by next summer. At the same time, demand for oil is also taking a bit of a knock from tougher Covid-19 measures. While demand has returned in places like China, we’re likely to see a fall in demand in Europe at least going into year-end, in Colin’s view, which would push back recovery of oil prices further into next year.
Meanwhile, the energy transition in the transport sector seems to be accelerating, said Colin. We’ve seen strong sales forecasts from some car producers, and several governments such as the UK are bringing forward their targets for the abolition of new combustion engine sales. This should be positive for battery makers and producers of electric vehicle components, many of which are based in EM countries. As most EM countries are oil importers, overall, this transition in motor fuels ought to be positive for EM, in Colin’s view, though he acknowledges it would undoubtedly cause some problems for EM oil-exporting countries like Russia. Russia has sizable currency reserves providing some insulation, but it’s starting to look for new sources of revenue to allow it to maintain its fiscal discipline, including raising extraction taxes in oil and mining sectors.
Colin Croft – Fund Manager, Emerging Markets
Taking a shine to midcap gold miners
The best way to understand the investment opportunities today in midcap gold miners and the potential benefits of consolidation is to look back at the last bull market for gold, when the price rallied around 600% between 2001 and 2011, said Chris Mahoney, fund manager in the Gold & Silver team.
Back then, miners of the precious metal became overly bullish and undisciplined, taking on excessive debt and pursuing ill-conceived acquisitions and unsuitable projects, he said. When the price of gold fell in 2011, these companies were exposed. What followed, said Chris was a painful period of impairments, dividend cuts, cost reductions, management shakeouts and slumping share prices.
Today, the midcap gold miners in particular are well run, cost-conscious companies with low debt levels, and this was evident in the sector’s strong 2Q results even with the Covid-19 impact. In Chris’s view, midcap gold miners also are cheap relative to their large-cap peers on most valuation metrics, but that spread should narrow as investors shift focus from better known and bigger companies to the midcap names.
Chris expects to see additional consolidation in the industry, with benefits for investors, as larger gold miners acquire midcaps to boost reserves. Exploration spending was massively cut in the period of austerity after 2011, leaving gold miners with an average of 10 years of reserve life, half as much as copper miners. Buying assets of other companies is the fastest way to boost gold reserves, Chris said, adding that takeover premiums have typically exceeded 30% over the last decade and may move higher as demand for these golden assets triggers bidding wars.
Chris Mahoney – Fund Manager, Gold and Silver
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Andrew Lloyd
25/09/2020