Investment Blogs

Please see below an article published earlier today from Blackfinch Investments, which outlines their latest views on markets across the world:

UK Commentary

US Commentary

Europe Commentary

Asia Commentary

Global Commentary

Based on the above it looks like things are potentially moving in the right direction, however, it is yet to be seen what impact today’s lockdown announcements from Boris will have on markets and the economy. I think it is fair to say that the overall recovery of industries and economies will drag into next year and even possibly the year after.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

12/10/2020

Please see below an article received late yesterday afternoon from Jupiter which provides their latest market consensus:

Emerging Markets

Four key themes for emerging market investing 

Salman Siddiqui, Fund Manager, Global Emerging Markets, outlined four investment themes that excite him in emerging market (EM) equities. These include the digital transformation of EM businesses, as companies use technology to improve the overall customer experience, such as through a better website or payment platform – and Covid-19 has obviously accelerated that need. IT consulting companies should be well placed to benefit from that trend, he said.

The second theme is a consumption and lifestyle improvement in EM, just one manifestation of which is in the area of sports participation, said Salman. China has seen a massive increase in the number of marathons, for example, and this trend offers opportunities for sportswear manufacturers. The third theme is the ‘plumbing’ behind the scenes of the technology sector, including chipmakers and chip designers. As the world moves towards greater automation and greater connectivity, Salman sees these companies as becoming more and more critical.

Salman’s fourth theme, financial inclusion, is one he sees as particularly important in EM, where it is not only a financial opportunity but also a social opportunity to help communities. He notes that in South Africa, where 12 million people – a third of the adult population – are classified as ‘unbanked’, there’s a company that offers financial products to help drivers start minibus taxi businesses. 80% of its customers were previously financially excluded and would not have had access to credit. The company has created a tech-savvy business that operates profitably, serves the country’s thriving minibus industry and provides drivers with a potential pathway to avoid poverty, Salman said. This is an example of an investment opportunity that not only stacks up well from an ESG point of view, he said, but is also appealing on fundamentals, combining high return on invested capital, a moat to help it sustain those returns over time and the ability to compound those returns over time.

Value Equities

Addressing disruption and ESG concerns for Value stocks

Value, as a style of investing, continues to experience an historic period of underperformance relative to Growth, said Ben Whitmore, Head of Strategy, Value Equities. The reasons often cited for Value’s continued stay in the doldrums include issues around disruption, ESG and low (or zero) interest rates into perpetuity.

On disruption, Ben highlights that Value investing has coped with disruption on other occasions over the decades. He is keenly aware that at times of disruption some industries do not survive, but believes that Value opportunities remain in sectors that, although they face challenges, are not facing an existential crisis. Ben sees ESG risk as an investment risk and is keen to point out that investors should look beyond simple ESG scorecards, which can reward companies merely for disclosure and describe the past more than they do the present or future. He thinks it is important for investors to look deeper at the specifics of a situation. An example is Japanese equities, which in aggregate are undergoing a positive change in governance culture, historically an area of weakness. Mining is another example. It’s a sector that understandably raises various ESG question marks, but Ben pointed out that base metals will remain a key component of the global economy and that investors should actively engage with mining company management on issues such as staff working conditions and environmental impact, among other topics.

The past few years have been a grim period for the Value style. However, when Ben looks at the extreme levels of low valuation, the strong balance sheets that can be found, and a historical precedent that shows Value has tended to bounce back strongly from periods of extreme underperformance, he feels relatively optimistic about the outlook for Value.

Global Convertibles

Green bonds finally come to convertibles market

Although convertible bonds as an asset class have done well year-to date, this has been driven almost entirely by 100%-150% rises in the share prices of US technology and software services stocks, says Lee Manzi, Fund Manager, Multi-Asset. With their sky-high valuations and often less-than-robust balance sheets, these stocks present a high hurdle to investment for any strategy aiming for superior risk-adjusted returns.

Lee notes the market is waking up to this risk. The latest Bank of America Merrill Lynch survey shows global fund managers have started to trim their tech equity positions and move into cyclical companies such as industrials. This can also be seen in the convertibles new issues market, which for much of 2020 has been dominated by tech firms coming to market, partly because high share prices reduce the probability of the bonds having to convert and dilute equity.

More recently, Lee has observed new issues coming from a much broader range of recovery-oriented companies such as airlines, retail and travel/cruise lines. The quantity of new issues is currently 80% higher than a year ago and the convertibles market is finally seeing the issuance of Green convertibles (e.g. by a giant French utility company), which have accounted for around 5% of new issues year-to-date designated as green bonds. Looking ahead, Lee expects these to make up an even greater proportion of new issues as the green bond market continues to grow and diversify. 

Absolute Return

Earnings momentum won’t guarantee returns

Last week, European equities outperformed global equities, partly driven by re-ratings, but more interestingly also by earnings momentum, said Tommy Kristoffersen, Equities Analyst, Absolute Return. A couple of months ago, Tommy noticed that those sectors with the biggest earnings downgrades were actually outperforming. More recently, however, that relationship has reversed into a more intuitive one, with earnings changes positively correlated with relative sector performance for the majority of sectors

Over time, there’s actually little evidence that picking the stocks with the best earnings momentum beats the market, said Tommy. Research from Liberum showed that a strategy of investing in the top quartile of UK stocks with best earnings momentum, and rebalancing monthly, would have generated the same returns over the last 20 years as investing in the bottom quartile. There’s one important caveat though: the bottom decile for earnings momentum dramatically underperformed other groups, generating a negative return over 20 years. So, in other words, it’s ok to identify stocks that are generating lots of earnings momentum, but the most crucial thing is to avoid the losers.

You might think, perhaps, that the best way to avoid the losers is to stay on top of earnings forecasts from sell-side analysts. However, research in the Review of Quantitative Finance and Accounting showed between 1995 and 2013, following sell-side earning upgrades failed to generate significant returns. Additional research shows that analysts consistently overestimate earnings growth potential, and the higher their forecasts, the less accurately they reflect the subsequent real earnings growth.

Combining these insights, Tommy thinks investors should be selective about the research they consume; and, if we want to improve on unreliable forecasts, we should be more pessimistic. We must acknowledge that, when stock prices are aligned with sell-side earnings expectations, all other things being equal, the market is likely overpaying for expected earnings.

In practice, this means greater scepticism about some of the big market themes like e-commerce, said Tommy. Several stocks playing on this mega trend have the boldest sell-side assumptions when it comes to long-term earnings growth. Given what we know about the inaccuracy of exuberant earnings growth forecasts and just how badly things can turn for these sorts of companies, several of these stocks seem like prime candidates for some investor pessimism.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

09/10/2020

Following on from the M&G article we posted yesterday, please see the below article from M&G:

Alongside their immediate priority to protect health, governments around the world are looking to ensure that the pandemic does not do irreversible damage to the global economy. Huge fiscal stimulus packages, amounting to trillions of US dollars, have been pledged in 2020 to try and prevent a protracted recession.

Infrastructure investment is high on the agenda, not only because it can lay the foundations for long-term economic growth but also because it is essential. Indeed, the need to reverse decades of chronic underinvestment in US infrastructure is one of the few things that presidential candidates Donald Trump and Joe Biden agree on.

As the urgency to move towards a zero-carbon economy has grown, the requirement for new and improved infrastructure has come into focus. I believe that calls for a ‘green’ recovery will only accelerate investment in solutions that support the low carbon transition.

‘Building back better’

In Europe, the issue of sustainability is central to the €750 billion “Next Generation EU” recovery plan, which promotes investments that help cut greenhouse gas emissions and advance renewable energy and energy efficiency.

It is hoped that large-scale public investment, combined with regulatory changes, will galvanise the private sector investment needed for the bloc to reach its goal of being climate neutral by 2050, in line with 2015 Paris Agreement commitments.

The infrastructure built today will determine whether climate targets are met. After all, the OECD estimates that more than 60% of global greenhouse gas emissions are related to physical infrastructure.

A transformation of the systems that form the backbone of modern society is therefore urgently needed. To meet the climate and development objectives articulated in the UN Sustainable Development Goals (SDGs), the OECD has estimated that US$6.9 trillion needs to be invested each year until 2030.

The need for cleaner energy

It is unsurprising that the energy sector is a top priority for decarbonisation, given power generation accounts for around 40% of global CO2 emissions.

Encouragingly, the shift away from burning coal, the most polluting fossil fuel, makes economic sense. The cost of wind and solar electricity generation has tumbled over the past decade, relying ever less on subsidies to be competitive. According to the International Renewable Energy Agency, replacing much existing coal-fired capacity with new solar farms would very quickly pay for itself .

Yet the scale of the challenge is enormous, especially as global demand for electricity is set to keep rising. The International Energy Agency estimates that around US$1.3 trillion a year needs to be invested if SDG 7 – affordable and clean energy for all – is to be achieved by 2030.

The call for better connectivity

Low-carbon electricity is a cornerstone too for more sustainable transport, which accounts for around one-quarter of global CO2 emissions. Beyond electric cars, the long-term trend towards growing urban populations creates a need – and an opportunity – for efficient mass transit systems.

The experience of the pandemic has also revealed the critical importance of the infrastructure that connects us digitally. Without the network of data centres, masts and cables, the ‘work from home’ economy would not have been possible.

Digital infrastructure can also be a ‘green enabler’, in the sense that better digital connections can reduce the need for travel and improve access to opportunities. Further investment is needed to enhance digital connectivity, which is a key ingredient to meeting SDG 9 – building resilient infrastructure, and promoting inclusive and sustainable industrialisation.

Opportunities in the ‘green’ recovery

Commitments to invest in a ‘green’ recovery should prove to be a powerful tailwind for companies that own and develop physical infrastructure assets, like wind farms, solar parks and electricity grids, all of which are necessary to transition to a lower carbon future. Likewise, businesses that own the digital infrastructure on which modern economies depend.

I believe infrastructure companies exposed to the structural shift towards a more sustainable economy are potentially well placed to prosper for decades to come.

The value and income from a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The Covid-19 Pandemic has shifted the focus even more so onto a ‘greener’ world, investments included. We knew this focus was coming but it has been kicked up a gear now.

Again, I’ll take this opportunity for another shameless plug of our blog series from the summer in which we provided an introduction to ‘ESG’. This will provide an explanation and more context regarding these investment themes.

What is ESG? – An Introduction – Blog Series – Part 1, Part 2 and Part 3.

Andrew Lloyd

09/10/2020

Please see the below article from M&G Investments:

Engaging with renewable energy champions on both sides of the Atlantic.

Among the core holdings in the M&G Global Listed Infrastructure Fund are NextEra Energy and Enel, two companies at the vanguard of renewable energy deployments. The critical nature of the underlying assets epitomises the attractions of infrastructure as an asset class, while the structural growth in renewables provides a powerful long-term tailwind for companies addressing climate change.

NextEra Energy is a US utility company which ranks as the world’s largest producer of wind and solar energy. With a broad geographic footprint across the US, NextEra Energy is the nation’s leading provider of clean energy including natural gas, a key transition fuel for the reduction of carbon emissions. It is also a market leader in energy storage, with more capacity than any other company in the US, to improve the efficiency of energy use.

Past performance is not a guide to future performance.

Enel, the Italian utility, shares the same philosophy of sustainable growth. Enel is a domestic champion but also a global company with a significant presence in the long-term growth markets of South America. Enel’s strategy combines significant and growing investment in renewables with an acceleration in decarbonisation by way of phasing out coal. The company is planning to increase renewables capacity by more than 30% over the next three years, with wind, solar and hydroelectric power expected to account for 60% of total capacity by the end of 2022.

Enabling the development of electric mobility is another key initiative, with Enel embarking upon the single largest deployment of charging stations in Europe. The company is proposing to increase the number of charging stations across the group by a multiple of nine over the next three years, from 82,000 last year to 736,000 in 2022.

Enel also has a clear commitment to returning cash to shareholders. The company’s guidance for dividend growth over the next three years is at least 8% per annum.

We invested in Enel in June 2018 when concerns about the political and fiscal situation in Italy led to indiscriminate selling in the Italian stock market, particularly in the more interest-rate sensitive sectors. Enel’s business is not confined to the domestic market and we saw the sentiment-driven weakness as a buying opportunity. The stock was purchased on a historic yield of more than 5% with robust and reliable growth in the dividend stream.

The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.

The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments. Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries. Further details of the risks that apply to the fund can be found in the fund’s Key Investor Information Document and Prospectus.

The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

This blog supports what we have been talking about lately with ‘green’ or ‘ESG’ investing. More fund managers are moving in this direction.

For more on ESG, please check out our 3 part blog series on ‘What is ESG? – An Introduction’ that we posted earlier this year. These blogs will give you an introduction to what ESG stands for, what it means, and what firms in the industry and we as a firm, are doing about it.

What is ESG? – An Introduction – Blog Series – Part 1, Part 2 and Part 3.

Andrew Lloyd

08/10/2020

Please see article below from Legal & General’s asset allocation team – received 05/10/2020

Our Asset Allocation team’s key beliefs

Prepare, don’t predict

Developments in the US election campaign remain highly unpredictable, so this week we discuss how the team thinks about political risk events and scenario analysis, our latest thoughts on the election itself, and our response in terms of asset allocation.

As with all Key Beliefs emails, this email represents solely the investment views of LGIM’s Asset Allocation team.

What’s the forecast?

We are fans of the Good Judgement Project, so were excited to have a virtual meeting with their ‘Superforecaster’ team this week. The initiative, led by Philip Tetlock and Barbara Mellers at the University of Pennsylvania, has regularly beaten even intelligence analysts with access to classified data when it comes to forecasting geopolitical events.

Their methods teach us how to become better forecasters ourselves, and this year they have released some time-series predictions from their network of Superforecasters on a number of COVID-19 related economic topics. These have helped us navigate the shifting timeline probabilities for vaccines and the likelihoods of fiscal stimulus in the US.

As a team, we have always been very interested in this topic: forecasting is our bread and butter, but we recognise it is not an easy task. We spend considerable time running scenarios for political risk events, macro outcomes and tail risks, as good forecasters are obliged to consider different scenarios. Our team motto is ‘prepare, don’t predict’. We have learnt to quantify our forecast likelihoods, and to update those likelihoods frequently and incrementally, with new information or simply as time passes.

The US election obviously poses our next challenge. It’s interesting to note the gap between the Superforecaster probabilities of a Democrat win, at 80% at the end of last week, and the betting odds suggesting a closer race.

Fireworks on the fourth or fifth of November?

Despite the wide gap in polls and a high apparent likelihood of a Democrat victory, we believe this race will feel tight until the night of the election. Due to an increase in postal voting and tensions between the parties, we see a high probability that no party will concede the election until sometime after the vote on 3 November. We believe the chances of a result by 4 November are below 50%.

The markets are also showing an elevated risk of a contested election, with expected volatility for November unusually elevated, even for an election year. But overall, we believe markets will price a likely winner well before either candidate concedes the election.

What can we say about the state of play for the big day? Well, there are not many undecided voters left in the US as views among voters have become more polarised, meaning voting switches are less likely. This is in contrast with 2016: the ‘decided’ share of the electorate in the US is currently 94%, which is roughly normal by historical standards, but in 2016 that number was 83% at the same point before the election.

There are many reasons to believe Joe Biden has an advantage: incumbents haven’t historically won after recessions, with rising unemployment, and with approval ratings below 48%. Democrats are also more unified than in 2016. Biden is polling well in battleground states, with Florida and Pennsylvania drawing our attention in particular.

Many states don’t start counting postal votes until election day, but Florida starts counting three weeks before then, so we may quickly be able to get a picture of how postal votes stack up to physical votes there. And in Pennsylvania we received interesting anecdotal information from our US-based colleagues about greater numbers of Trump placards and billboards in recent weeks, which may show that the president’s ground operation is paying off compared with Biden’s virtual-focused strategy. Indeed, that is reflected in new voter registration in Pennsylvania. Republicans added a net 135,619 voters from June to end September, while Democrats added 57,985. Back in 2016, Trump won the state by a margin of just 44,292 votes, so these numbers matter.

Fatter tails

After the news of Trump’s positive COVID-19 test, we moved our short-term US Treasury and overall duration outlook to become more negative. We had been looking for an opportunity to reduce duration risk ahead of the election, so the market’s knee-jerk reaction to the news – with perceived safe havens jumping higher – presented us with an attractive opportunity to make our move.

Market pricing in the past week has confirmed the sensitivity of the US Treasury markets to potential stimulus. In our opinion, more fiscal stimulus drives up yields through two channels: more issuance for the market to digest, and firmer near-term growth prospects.

We still don’t know exactly how Trump’s health will impact the election, but it introduces even more volatility into the race. If we think the distribution of potential outcomes is now fatter, then it increases the chance of a Democrat clean sweep of the White House and Congress. That is, in our view, the most negative scenario for US Treasuries.

The main risk to this is the prospect of stalling economic growth in the fourth quarter if fiscal stimulus fails to flow to a material degree. However, we struggle to believe that that will be as important as news on potential vaccines and the election.

A good input from Legal & General giving a view on political risk events and their latest thoughts on the US election.

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

Charlotte Ennis

06/10/2020

Please see below an article published earlier today from Blackfinch Investments, which outlines their latest views on markets across the world:

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

05/10/2020