Investment Blogs

Please see below the latest ‘Markets in a Minute’ article from Brewin Dolphin received yesterday – 26/01/2021

US equities strengthen on stimulus plans

Global equities performed relatively strongly last week, as fresh hopes of US stimulus outweighed concerns about extended lockdowns in Europe.

The Nasdaq was the strongest performer among the main markets, rising by an impressive 4.19% thanks to a comeback from the FAANGs. The S&P 500 and the Dow also recorded gains, with investors celebrating Joe Biden’s inauguration and Janet Yellen’s call for Congress to ‘act big’ on stimulus measures.

Renewed coronavirus concerns weighed on the UK’s FTSE 100 as well as several European indices. Over in Asia, hopes of better relations between China and the US boosted the Shanghai Composite by 1.13%, while the Nikkei remained relatively flat.

Last week’s markets performance*

• FTSE100: -0.60%
• S&P500: +1.94%
• Dow: +0.59%
• Nasdaq: +4.19%
• Dax: +0.63%
• Hang Seng: +3.06%
• Shanghai Composite: +1.13%
• Nikkei: +0.39%

*Data from close on Friday 15 January to close of business on Friday 22 January.

Merck abandons vaccine

News that pharmaceutical giant Merck is abandoning its vaccine development efforts have dampened last week’s gains. The FTSE 100 slipped a further 0.8% yesterday amid fears that Merck’s decision could delay the global rebound from the pandemic. Airlines, who could face severe travel restrictions, struggled the most, with shares in International Consolidated Airlines 7.2% lower.

In the US, the S&P 500 and the Nasdaq briefly turned negative yesterday, but the Nasdaq ended up closing at a record high, gaining 0.69% ahead of quarterly results from Apple, Microsoft and Facebook this week. The Dow, in which Merck is a component, ended yesterday 0.12% lower.

US celebrates Biden and the FAANGs

Following his inauguration last Wednesday, Joe Biden wasted no time in unveiling details of how he intends to support the US through the pandemic. His proposed $1.9 trillion Covid-19 fiscal package includes another round of direct payments, an increase in the federal weekly unemployment insurance benefit and, somewhat controversially, a hike in the national minimum wage to $15 per hour.

Biden also repeated his goal of one million vaccinations a day for the first 100 days of his presidency, and reversed Trump’s decision to withdraw from the World Health Organization and Paris Agreement on climate change.

The fact that Biden’s inauguration took place without any significant violence helped to calm nerves, as did strong provisional services PMI and better-than-expected housing data.

Although Biden’s election has brought some comfort to investors, it is worth noting that his Cabinet appointments are less market-friendly than Trump’s were. His appointments for the head of the Securities and Exchange Commission, the Consumer Financial Protection Bureau and the Senate Banking Committee could result in tougher regulations for the financial sector.

Last week also saw the return of big mega-caps in the US, which helped to drive up the Nasdaq and S&P 500. Netflix, which reported robust earnings, gained 13.5%, while Apple, Google and Facebook all rose 9%. A strong start to the US reporting season added to investor optimism for the new president.

Lockdowns extended in Europe

Over in Europe, investor sentiment was more subdued as renewed coronavirus concerns took hold. Germany’s Xetra DAX Index edged up by 0.63%, whereas France’s CAC 40 and Italy’s FTSE MIB both declined by 0.93% and 1.31%, respectively. The UK’s FTSE 100 Index fell 0.60%.

There are growing concerns that social distancing restrictions in the UK could last until the middle of the year, after Boris Johnson announced it is ‘too early’ to say when the national lockdown will end. Germany extended its restrictions until 14 February, and The Netherlands introduced its first nationwide curfew since World War II.

Disappointing economic data did not help matters. A Purchasing Managers’ Index revealed business activity in the eurozone contracted at a faster rate in January, while the UK’s quarterly CBI business optimism index plunged from 0 to -22, largely driven by fears about the impact of Covid-19 on British businesses.

Q1 is shaping up to be a bad quarter for the UK economy

In contrast, gilt yields increased after Bank of England governor Andrew Bailey said he anticipated a pronounced economic recovery in the UK later in the year as vaccines are rolled out.

Japan trims GDP forecast

In Japan, the Nikkei rose 0.39% following the country’s first positive exports data since November 2018. The government also announced it has agreed to buy additional vaccines for 12 million people, meaning it will have enough to vaccinate more than half of the country’s population.

On the flipside, Japan’s monetary policy committee lowered its gross domestic product (GDP) growth forecast for the current fiscal year from -5.5% to -5.6%. Although it increased its growth target for 2021 from 3.6% to 3.9%, it warned that the outlook was highly uncertain.

In China, where stocks rallied following Biden’s election, forecasts revealed the economy grew by 2.3% in 2020 – a clear sign that, unlike much of the rest of the world, it has largely recovered from coronavirus lockdowns. Fourth quarter real GDP growth increased to 6.5%.

Markets show impressive resilience

Overall, global stock markets are showing remarkable resilience during the pandemic, underscoring the case for exposure to risk assets. Markets are on course for a third consecutive month of gains, and more stocks are hitting their 52-week highs.

Now, all eyes are on this week’s raft of US corporate earnings figures. Investors will be looking for insight into whether tech stocks can continue their strong growth trajectory over the coming year.

Please continue to check back for our regular blog posts and updates.

Charlotte Ennis

27/01/2021

Please see below commentary received from Blackfinch Group this morning, which provides market analysis as Lockdown 3.0 continues in the UK and Joe Biden is inaugurated as 46^th President of the United States.

UK COMMENTARY

• The Office for National Statistics released labour productivity data showing that output per hour, the UK’s headline measure of labour productivity, increased 4.0% year-on-year in the third quarter of 2020, the largest increase since the fourth quarter of 2005. The Coronavirus Job Retention Scheme continued to impact output per worker productivity, which fell 7.9%.
• Inflation, measured by the Consumer Price Index, rose 0.6% in November, pushed higher by transport and clothing costs.
• Average house prices in the UK jumped 7.6% in the year to November 2020, to reach a record high of £250,000.
• Retail footfall fell 10.9% in the week to the 16th of January, with year-on-year footfall down 67.5%.
• Retail sales data showed volumes fell 1.9% in 2020, with clothing sales the hardest hit, falling by a quarter from the previous year.
• IHS Markit/CIPS flash UK composite purchasing managers’ index (PMI) in January fell to an eight-month low of 40.6, down from 50.4 in December.

US COMMENTARY

• Joe Biden was inaugurated as 46th President of the United States and got straight to work, using executive orders to reverse some of Donald Trump’s more controversial actions, including returning the US to the Paris Climate Agreement.
• President Biden also moved forward with his plans to launch a further stimulus package, but investors await final confirmation of the deal.
• Incoming Treasury Secretary Janet Yellen called on Republicans to back the stimulus package and urged the US to “act big” to revive the economy.
• US initial jobless claims fell to 900,000 last week, but remain at elevated levels. Continuing claims also fell marginally by 127,000 to 5.18mn.

ASIA COMMENTARY

• Official data showed Chinese gross domestic product was 2.3% in 2020, having expanded by a better-than-expected 6.5% in the fourth quarter.

COVID-19 COMMENTARY

• New research by BioNTech found that its vaccine, jointly produced with Pfizer, is effective against the new variant of COVID-19 originally identified in the UK. The results echo those from a previous Pfizer study that showed the vaccine was effective against virus mutations identified in the UK and South Africa.

The ever-changing world we live in reinforces the importance
of regular up-to-date communication. Please check in again with us soon for further market updates and news.

Stay safe.

Chloe

25/01/2021

Please see below article received from AJ Bell yesterday afternoon, which provides an insight into what rising prices mean for value stocks and emerging markets.

One theme which continues to exercise financial markets is whether inflation is primed to make a comeback and – if so – what this could mean for asset allocation and portfolio strategies.

The five-year forward inflation expectation in the US now stands at 2.11%, its highest level since December 2018, and financial markets are beginning to react: bond yields are ticking higher, bitcoin is going bananas while gold holds relatively firm. Within equity markets cyclical growth (or ‘value,’ for want of a better word) is again trying to cast off a decade of underperformance relative to perceived secular growth sectors such as technology.

As this column has suggested before, the battle for portfolio style (and performance) supremacy within equities can be seen by comparing the returns provided by two exchange-traded funds (ETFs) in the US: the QQQ Invesco Trust, which follows the price of the biggest non-financial stocks on the NASDAQ, and the Russell 2000 Value ETF.

If the line on this chart goes up, ‘growth’ is outperforming. If it goes down, ‘value’ is outperforming. As can be seen, cyclical growth outperformance stretches to summer 2020.

But this trend can be seen in another way too, this time on a geographic basis. Over the past decade, investors have adapted to the low growth, low inflation, low interest rate environment by buying long-dated assets such as bonds and equity growth (such as technology stocks), and forgetting about commodities, cyclical equities (‘value’) and emerging markets.

Yet as inflation creeps back onto the radar, perhaps for the first time in 40 years since then Fed chairman Paul Volcker set about wiping it out, emerging markets are coming back into fashion too.

This can be seen using the same technique as before, this time by dividing the performance of America’s S&P 500 index by the MSCI Emerging Markets benchmark. American outperformance peaked in September, since when emerging arenas have done better.

Clear pattern

This return to form for emerging markets coincides with a period of strength for commodity prices and dollar weakness. Whether it lasts may hinge to a great degree on those two trends, which also tie into the inflation narrative.

If those three continue to coincide, then we could see a third major period of emerging market outperformance relative to the US (and by implication developed markets), to match those of 1988-1994 and then 2000-2010, so this EM resurgence must be monitored closely. If it proves to be no mere flash in the pan, then it could have profound portfolio implications.

The resurgence of EMs can be seen by digging deeper into geographic performance trends, too.

Japan may be the best performer, in total return, sterling-denominated terms over the past 12 months, but Asia is a close second. The data from the past six months, when cyclical growth, or value, began to try and forge its latest comeback, show outperformance from not just Asia, but the Middle East and Africa, Latin America, and Eastern Europe, too.

East of Eden

Global export plays like South Korea and Taiwan have done well of late, but tourism and travel destinations like Thailand and Hong Kong are clear laggards. Perhaps South East Asia becomes the next leg of the post-vaccine, global upturn story.

There may be other reasons for the return to form of emerging markets, beyond commodity strength, dollar weakness and markets’ preoccupation with inflation and a near-term economic recovery, as this column hinted just under a year ago.

Perhaps Asia’s outperformance reflects the view that region was first in and first out when it comes to the global pandemic (even allowing for recent local flare-ups). Given the experience of SARS in 2002-03, Asia may have been better prepared and equipped to deal with such a situation.

In addition, Asian nations learned harsh lessons about debt during their currency crisis of 1997-98 and as a result aggregate government borrowing levels are generally much lower as a percentage of GDP than they are in the West.

Such facets could help to shape long-term outperformance too, especially as soundness of finances usually wins out in the end.

We will continue to publish news and market analysis. Please check in again with us soon.

Stay safe.

Chloe

22/01/2021

Please see below update received from Brooks MacDonald earlier today, which analyses global market performance over the past few days.

What has happened

With US markets closed yesterday, equity moves were fairly small and we saw more of a consolidation than any momentum one way or another. That said, European and Asian markets did gain ground with the latter helped by the strong Chinese GDP data at the start of the week.

Yellen’s confirmation hearing

Later today, Janet Yellen, former Fed Chair will set out her plan to the Senate finance committee ahead of her confirmation as Treasury secretary. The prepared remarks have already been leaked and the highest profile phrase is that ‘the smartest thing we can do is act big’. Yellen is expected to reiterate the need for fiscal spending saying that the downturn in the economy could lead to a ‘longer, more painful recession’ if stimulus bills such as that proposed by President-elect Biden falter. The first test for the new President will be the passing of $1.9 trillion of relief measures which may prove challenging given the tiniest of working majorities in the Senate. There will inevitably be questions about the longer-term funding of the deficit created by these measures and the interactions between the Fed and Treasury given Yellen’s former role.

COVID Update

Cases remain elevated across Europe but there are signs that the tougher restrictions are starting to work with Italy seeing its daily cases fall below 10,000 for the first time this year and the UK dipping below 40,000 as Lockdown 3.0 takes effect. Germany is also expected to extend its lockdown further due to concerns over the new variants after being in heightened restrictions for several months. On the vaccine there continue to be impressive numbers out of the UK which is one of the fastest moving of the major economies. The EU are also seeking 70% of the bloc’s population to have had the vaccine by the summer so signs of momentum, or at least ambition, building. In less positive news, California’s state epidemiologist has recommended the pause of the rollout of the Moderna vaccine after severe allergic reactions.

What does Brooks Macdonald think

Yesterday saw a brief lull in market activity after an eventful start to 2021, with central bank meetings, politics and earnings this is unlikely to last too long. Against this backdrop the vaccine rollout has begun in earnest which means that with each passing day the economic risk of reopening marginally reduces. Of course, the question for governments will be what proportion of the population needs to be vaccinated before the risk of the virus is ‘acceptable’, expect this to be a major debate in Q2 2021.

Please check in again with us soon for further relevant content and news.

Stay safe.

Chloe

19/01/2021

Please see article below from J.P. Morgan received this morning – 18/01/2021

When will the vaccines allow for a sustained economic recovery?

15-01-2021

For months, the question on everyone’s lips has been, ‘When can we start getting back to normal?’ The short answer is, ‘When the vulnerable have been vaccinated and the healthcare systems are comfortably coping with Covid-19 cases’. The more complete answer is a little more complex. Protecting the vulnerable will facilitate the process of a sustainable reopening but caution will still be required until a broader group are vaccinated, and the timetable will differ around the world. Our base case for major developed economies is that the process of sustainable reopening begins in the spring, and in the latter months of the year we see a meaningful bounce in economic activity as pent-up demand is unleashed.

The charts in this report will be updated twice a week in our tracker for readers to follow the progress of the vaccine rollout.

Vaccinating the vulnerable should drastically reduce mortality and hospitalisations from Covid-19

Governments around the world are adopting strategies to vaccinate the most vulnerable first, which should reduce mortality from the virus but also ease the burden on healthcare services. This approach makes sense given Covid-19 causes a disproportionate level of deaths and hospitalisations among older cohorts. In the UK, there are nine million people aged over 70, accounting for 13% of the total population, but 84% of the total Covid-19 deaths and over 50% of total hospitalisations (Exhibit 1).

Exhibit 1: Demographics and Covid-19 in the UK

Source: Office for National Statistics, British Medical Journal, J.P. Morgan Asset Management. 
*Based on deaths in England and Wales where Covid-19 is mentioned on the death certificate.
**Based on an analysis of the first wave published in the British Medical Journal. Data as of 14 January 2021.

Throughout the Covid-19 pandemic we have seen how the health and economic crises have been inextricably linked. If vaccinating the vulnerable significantly reduces the number of new hospital admissions, then governments will feel more comfortable about relaxing restrictions, allowing economic activity to begin normalising.

The pace of vaccine rollout is key

At the time of writing, the UK and US have made solid starts in vaccinating their populations, while the major European economies are off to a slower start (Exhibit 2). 

Exhibit 2: Covid-19 vaccine rollout
Cumulative doses administered per 100 people

Source: Our World in Data, J.P. Morgan Asset Management. Data as of 14 January 2021.

The UK government has announced an ambitious plan to offer vaccinations to its top four priority groups – amounting to 15 million people – by 15 February. These groups include those over the age of 70, frontline workers and those that are clinically vulnerable. The time between first and second dose of vaccines administered in the UK has been extended to 12 weeks to allow as many people as possible to receive at least the first dose, which the government’s advisers view as the best way to reduce mortality and the strain on the health system.

How feasible is it to vaccinate such a large group of people in such a short space of time? In the 2019-20 flu season, the UK vaccinated over 14 million people over a five-month period. The UK health system already has significant experience in vaccinating millions, but it needs to do it around five times as fast as normal. Several mass vaccination centres are planned around the country to meet this ambition, with some vaccinating 24/7. The government has expressed confidence that this will provide sufficient distributive capacity to allow it to meet its goal, and that distribution needs will be met by the supply of approved vaccines, of which the UK now has three.

We think the target is broadly achievable. Whether or not it is achieved exactly to the day is primarily a political concern, but the proposition of having the majority of the UK’s vulnerable with some protection by the beginning of March ought to be a game-changer (as Exhibit 1 suggests) and allow for a process of sustained economic recovery to begin in the second quarter.

The rollout in the US and EU is likely to continue to lag the UK, but both should still have vaccinated the most vulnerable in the first half of the year. Both the Pfizer and Moderna vaccines are approved in the US and the EU, and sufficient doses have been secured to vaccinate the vulnerable population.

The EU, in particular, will benefit considerably if its regulators approve the AstraZeneca/University of Oxford vaccine in the coming weeks, since it has ordered doses to cover more than 40% of its population and this vaccine is logistically easier to handle (Exhibit 3).

Exhibit 3: Confirmed orders for vaccinations per head of population
Complete vaccination courses per head of population

Source: Duke Global Health Innovation Center, World Bank, J.P. Morgan Asset Management. This chart shows the number of complete vaccination courses that a given country has confirmed orders for. Data as of 9 January 2021.

The success of the three pioneering Covid vaccines will have a huge impact in taming the pandemic, but there are also many other vaccine candidates that could be approved in the coming months that would bolster the world’s supply. Novavax and Johnson & Johnson (J&J) are two of 20 vaccine candidates currently in phase III trials, and have large orders confirmed.

However, it is clear that the vaccine rollout will be unequal. The deep pockets of developed governments have allowed them to secure vaccinations to more than cover their populations. Lower-income emerging market countries have order books that fall short of their populations, giving them less room for error in their rollout strategies. As a result, many will have to rely on the COVAX scheme – a consortium set up by the World Health Organisation and others to ensure that all countries have access to Covid-19 vaccines – and can expect a slower return to normality. COVAX has large orders for the AstraZeneca/University of Oxford and J&J vaccines.

One part of the emerging world is less reliant on vaccines for its economic recovery: North Asia. Through effective testing, contact tracing and strict border controls, the region has been able to recover quickly without the help of vaccines. For investors in emerging markets, this disparate outlook calls for a selective approach. 

We are optimistic on the path of vaccine rollout, but mindful of tail risks

The rollout of vaccines in the developed world should allow economies to recover sharply in the second half of the year as normality returns and consumers are finally free to unleash their pent-up savings. We expect that the UK and US will have vaccinated over half their populations in the first half of the year, and the EU will reach that milestone during the summer.

The strong rebound in developed market activity should be supportive of risk assets, and in particular stocks that stand to benefit the most from a rotation from the Covid winners to those that lost out from the pandemic. Europe, the UK and the value style stand out in this respect. The emerging markets could also perform well in this environment, driven by continued strong economic performance in Asia and a gradual decline in the US dollar.

Of course, there remain risks. We are less concerned about the vaccine timetable slipping for logistical reasons, and think that plans could even be accelerated. Governments are under tremendous pressure to at least keep up with their neighbouring counterparts. And given the fiscal cost of maintaining economic restrictions, no expense will be spared in driving the rollout. 

Uncertainty around take-up is a hurdle for all countries, and surveys suggest a significant degree of scepticism for the Covid-19 vaccine in Europe. Experience in the UK suggests that as the vaccine rollout is proceeding, public confidence is growing, and many may feel increasingly confident of taking up the vaccine as time progresses.

The key risk is that the virus mutates to a new variant that makes the currently approved vaccines ineffective. There is also the risk that vaccine efficacy is lower than initially reported, either among the older population, or across the population from altering the time between first and second doses. Data from trials hasn’t been completely comprehensive in these areas. Many of these risks could be addressed – and rather than derailing the recovery completely, could just provide a setback while new formulations are found. However, we think it prudent for investors to maintain tail-risk protection such as through long-duration government bonds or dynamic fixed income and macro strategies.

A good update from J.P. Morgan with more positive news on the vaccine roll out.

Vaccinating the most vulnerable should drastically reduce mortality and hospitalisations from Covid-19. Hopefully, once the most vulnerable are vaccinated, governments will feel more comfortable about relaxing restrictions, allowing economic activity to begin normalising.

Please continue to check back for our latest blog posts and updates.

Charlotte Ennis

18/01/2021