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Brooks Macdonald – Weekly Market Commentary

Please see below this week’s market commentary update article from Brooks Macdonald, which was received late yesterday afternoon:

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

15/09/2020

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Blackfinch Group Monday Market Update

Issue 8, 14th September 2020

Please see below for the latest Blackfinch Group Monday Market Update:  

UK COMMENTARY

  • House prices rose 1.6% in August from July’s level according to the Halifax House Price Index. The annual increase in house price accelerated to 5.2% from July’s 3.8%, hitting its highest level since 2016.
  • Reports suggest that the UK is willing to walk away from Brexit negotiations in mid-October if a free trade agreement hasn’t been agreed upon.
  • A week of Brexit talks conclude with the EU telling Britain that it should urgently scrap a plan to break the divorce treaty, but Boris Johnson’s government have refused and continued with a draft law that could collapse four years of negotiations.
  • A rise in the number of COVID-19 cases in the UK brings fears of a second wave, forcing the government to reimpose some restrictions over social distancing. Daily cases have risen to close to 3,000, from c.1,000 at the end of August.
  • The British Retail Consortium’s figures report that year-on-year growth in retail sales rose 3.9% in August, but city centre shops continue to struggle.
  • UK gross domestic product (GDP) rose for the third month in a row in July, up 6.6%, although this is still 11.8% below January’s level.
  • A report from the National Institute of Economic and Social Research forecasts that the UK economy will emerge from recession at the end of the third quarter.

US COMMENTARY

  • Comments from Donald Trump that he may seek to ‘decouple the US economy from China’ suggest that the trade war between the two nations is far from over.
  • The US revokes visas for over 1,000 Chinese students on grounds of ‘national security’.
  • Initial jobless claims for the week are an exact repeat of the previous week’s number of 884,000. Continuing jobless claims rose to 13.39mln, above analyst expectations of 12.92mln.
  • Once again mutual agreement between the Democrats and the Republicans fails to be reached over details of a further COVID-19 support package.
  • US inflation rises by 0.4% in August, higher than forecast, but below the 0.6% rise seen in July.

EUROPE COMMENTARY

  • Insee, the national statistics institute of France, forecasts that the economy will contract by 9% this year, down from earlier predictions of an 11% drop.
  • EBC President Christine Lagarde announces that monetary policy remains unchanged, but that the bank has to carefully monitor the ‘negative pressure on prices’ that the Euro is exerting.

ASIA COMMENTARY

  • Revised GDP figures for Japan show that the economy shrunk by 28.1% in the second quarter of the year, worse than preliminary estimates released in mid-August.
  • China reports its largest jump in exports in 18 months, rising 9.5% in August compared to a year prior.

COVID-19 COMMENTARY

  • AstraZeneca confirmed that it had halted work on its COVID-19 vaccine, currently in development with Oxford University, after a ‘serious event’ during the trial process, reported to be a member of the clinical trial falling ill. However, trials officially restarted over the weekend.

These articles provide concise well-informed views that cover the whole of the market and are useful to maintain your up to date view of the markets globally.

Please keep reading our blogs regularly to give yourself a holistic and up to date view of the markets.

Keep safe and well,

Paul Green

14/09/2020

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Jupiter Asset Management – Active Minds Blog

Please see Active Minds article below from Jupiter Asset Management – received 10/09/2020

Active Minds – 10 September 2020

Ed Meier – Fund Manager, UK Alpha

Exciting opportunities in UK’s transition to clean energy

When it comes to the transition to clean energy, the UK is well placed with the North Sea, which provides ample capacity to store captured carbon, along with the country’s amazing wind energy potential, said Ed Meier, Fund Manager, UK Alpha and specialist in utility companies.

In fact, energy from wind assets in the UK has the potential to be comparable to Saudi Arabia’s energy production from oil. Saudi Aramco produces around 12.5 million barrels of oil a day while the UK wind, if fully developed, could potentially generate the equivalent of 20 million barrels of oil a day, Ed said. It’s a phenomenal potential asset that would be exportable, and the UK government is very much supportive, he said.

In utilities there is a shift in market appetite related to the move to net zero emissions, Ed says. It’s now a legal responsibility for many governments around the world. In the EU, final energy consumption has recently been 20% electricity and 80% fossil fuels. To get to net zero, those numbers must reverse. This means extraordinary potential growth for an industry that has been shrinking. This provides an interesting opportunity, though with limited areas to invest in the UK, which has sold off much of its utility assets, he says.

There is a one publicly-listed utility UK company that is producing 12% of the country’s renewable energy, and the market is underpricing the stock, in Ed’s view. The company is reducing its cost base as it aims to produce clean electricity without subsidy post 2027. In addition, the company is developing a technology called biomass energy, carbon capture and storage (BECCS). It’s a global pioneer in this area and potentially could be a negative carbon producer (i.e. removing carbon from the air) – a vital step in helping companies get to net zero. Thus, negative emission technology could provide a significant level of value for the company, he says.

We’re all over the opportunities from the energy transition in the UK and believe it’s quite exciting, Ed says.

Matthew Morgan – Product Specialist, Multi-Asset

Fed’s fatal attraction to loose policy

The significance of what Jerome Powell and the Federal Reserve are trying to do should not be underestimated, said Matthew Morgan, Product Specialist, Multi-Asset. The recent speech from Powell could mark a critical break from three decades of central bank behaviour. It doesn’t necessarily follow that we’re going to see inflation rise imminently. What matters for markets is less the specific outcome a few years hence, more the balance of probabilities now. What the Fed plans to do shifts that balance from deflation towards inflation.

Following the ‘stagflation’ of the 1970s, the US Congress gave the Fed three main objectives in the Federal Reserve Reform Act of 1977: maximum employment, stable prices and moderate long-term interest rates, in that order. Since then, the principal target of central banks has arguably been to control inflation.

It’s the first point (maximum employment) that falls under the spotlight now. The Fed’s recent announcement of Flexible Average Inflation Targeting (FAIT) acknowledged that the Fed will do whatever it takes to deliver full employment, even if it means inflation being above the 2% target for a period of time.

Powell’s speech makes it clear that the lessons learned from the past few years are that the economy can sustain a higher employment level than previously thought without risking inflation (effectively admitting that 2018’s rate hikes were a mistake), and that the benefits of higher employment were beginning to be shared more widely across society. In addition, higher inflation is the easiest way to bring debt levels down.

This is a significant change to the Fed’s interpretation of its mandate. While there are many that will look – with good reason – to the significant deflationary pressures out there, for the multi-asset team the key takeaway is that this announcement frees the Fed to keep its foot on the gas for much longer than it could previously.

Joe Lunn – Fund Manager, Gold & Silver

Hi Ho, Silver!

The current bull market in gold and silver is best explained in macroeconomic terms, says Joe Lunn, Fund Manager in the Gold & Silver team. Investors’ disenchantment with the US dollar, due to the US Federal Reserve’s determination to continue to print money, has led them to reassess the merits of monetary metals. Yields on government bonds have become so low that they are unlikely to outpace inflation which means that some government bondholders face losses in real terms. Gold and silver, by contrast, are stores of real value.

During bull markets for monetary metals, silver can often rise faster than gold, says Joe. During recent months, the gold/silver ratio (the gold price per ounce divided by the silver price per ounce) has contracted. Silver has risen more quickly than gold: their ratio has fallen from 124 on 18 March, to 72 on 8 September. Joe expects it go lower still.

Joe believes silver bulls should play the contraction of the gold/silver ratio by investing in shares of mining companies. This allows investors to take advantage of the operational gearing in businesses where costs are largely fixed. A rise in the gold and silver price of about 20% could translate into a rise in a mining company’s EBITDA (net earnings with interest, tax, depreciation and amortisation added back) of more than 30%, he says. He also likes miners that are unlikely to issue new shares (some North American silver miners are prone to such dilutive behaviour).

A government’s attitude to COVID-19 is also important, Joe says. Mexico, for example, has granted key industry status to mining: mines would stay open even if much of the economy goes into lockdown. Peru, by contrast, is allowing companies to make up their own minds: miners might shut production if the second wave of infections continues to worsen. 

While Joe has strong views on the relative merits of individual mining companies, many of whose mines he has visited, he believes they should be held within a diversified portfolio as individual companies are not without risk.

Liz GiffordFund Manager, Global Emerging Markets

It’s not all about technology in emerging markets

Liz Gifford, Fund Manager, Global Emerging Markets, spoke about the opportunities available to emerging market equity investors outside of the large cap tech names that have been in such favour, particularly since the start of the pandemic. Liz and the team have a preference for companies with three key features: a high return on capital, a competitive advantage (protective moat) to protect those returns and the ability to grow while maintaining the high returns.

There are several examples of large, high-profile technology companies in emerging markets that meet those criteria, yet last week’s sharp correction in the US tech names underlined the need for investors to be well diversified across sectors. Liz touched on some examples of areas where the team can find attractive opportunities outside of large cap technology stocks.

One example she highlighted was a car rental company in Brazil with a 35% market share. It is the largest player in its local market, has scale and buys twice as many cars as its nearest competitor. This gives the company significant bargaining power that can benefit customers through lower pricing, which further reinforces the company’s dominant position in the marketplace. Covid-19 has presented challenges for the company, of course, but in the end Liz believes it will strengthen this company’s competitive position as smaller players go under.

On a similar theme, Liz also highlighted Thailand’s leading decorative paints company. The company has arguably already achieved its maximum market share, but Liz and the team see the local market has being underpenetrated both in Thailand itself and in neighbouring countries. Here the competitive advantage is in the paint mixing machine at the point of sale, these are expensive to replace and retail outlets don’t typically have capacity for more than one – keeping competitors at bay. The company’s high return on capital and continued growth potential make it attractive to the team. These are just two examples of the kind of stock opportunities that are available outside of the large cap tech names that tend to dominate passive indices.

Articles like this are useful for getting an insight to the market from market experts.

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

Charlotte Ennis

11/09/2020

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Legal & General – Asset Allocation Team Key Beliefs Blog

Please see article below from Legal & General’s asset allocation team – received 07/09/2020

Techastrophe or Techantrum?

This week we focus on technology stocks, given the recent drama, but also stand back from the hurly-burly and reflect on how far expectations for a vaccine have come since COVID-19 hit in the spring. We also touch on the recent change in tack from the European Central Bank (ECB) where the drumbeats of verbal intervention have started, and inflation data have – once again – been dire.

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

Shaken, not stirred

In an impeccably timed blog published last Thursday, Lars asked whether now is the time to start taking profits on technology stocks. Investors across the world obviously took note and decided that the short-term answer was an overwhelming ‘yes’, with the Nasdaq down around 10% in just two days. In recent months, we’ve seen record after record broken by technology stocks.

Nigel Masding on the Active Equity team produced some eye-popping statistics this week, looking at year-to-date returns for the MSCI World, which sum this up nicely. Until the end of August, the index of 1,718 stocks had generated a return of +5.7%. Just four stocks contributed enough on their own to push the index into positive territory and to deliver this return: Apple, Amazon, Microsoft* and Tesla*. An index composed of the other 1,714 stocks is still underwater (source: Bloomberg).

With that in mind, are we seeing the tech bubble pop or is this just a short technical correction? We favour the latter interpretation. There was no apparent news flow that was a convincing catalyst for the move and the overall pattern of performance within equities was not consistent with a risk-off environment or of particular virus concerns. Still, there were a few hints of pretty irrational behaviour in the immediate run-up to Thursday, with high-profile stock splits seemingly responsible for driving tech names higher last Monday and Tuesday.  

We have long-held two guiding principles for assessing when the time might be right to exit technology stocks: excessive valuations and excessive bullishness. In our opinion, neither signal has turned red yet. Outperformance has been driven by a step-change in earnings rather than by valuations. On sentiment, it is impossible to argue that tech is a particularly unpopular sector, but we don’t see signs of excessive bullishness either. For context, we’ve been tactically positive on technology stocks (relative to the broader market) since early 2018.

In the week in which a new trailer for the latest Bond film was released, our conviction in that trade is shaken, not stirred.

Vaccination vacillation

In the late 18th century, Edward Jenner pioneered the world’s first inoculation by intentionally infecting an eight year old boy with cowpox. Medical trials have evolved somewhat since then, but the word vaccine still derives from the Latin for cow. And it is hopes of a vaccine breakthrough that have continued to drive the bull market in equities and credit over recent months. This week saw the Centre for Disease Control (CDC) in the US issue advice to State governors to prepare for potential vaccine distribution as early as 1 November. The chart below, from Professor Philip Tetlock’s Good Judgement Project, shows the extraordinary change in expectations around the timeline to that vaccine. The chance of a vaccine being widely available by March next year is now seen as more likely than not, having been almost inconceivable only a few months ago.

Good Judgement Project: When will enough doses of FDA-approved COVID-19 vaccine(s) to inoculate 25 million people be distributed in the United States?

Source: LGIM, Good Judgement Project, 4 September 2020. There is no guarantee that any forecasts made will come to pass.

In the meantime, Jason Shoup of LGIM America raises the intriguing possibility of a breakthrough in testing technology. If cheap (<$5), rapid (<15 min), saliva-based (i.e. no nose swab), and self-administered coronavirus tests become widely available, it would allow a rapid normalisation in sectors where social distancing is difficult/impossible. The US government have called the development of a vaccine “Operation Warp Speed”. Not to be outdone, the UK government dubbed the development of rapid testing technology “Operation Moonshot”.

Financial markets will be willing to forgive signs of an economic stumble in the short term, provided that the medium-term outlook continues to look reassuring. With COVID-19 cases rising fairly rapidly across large parts of Europe again, these breakthroughs cannot come soon enough.

EUR-eka moment in FX markets

In the last few years, one of the most consistently poorly performing investment strategies has been following currency momentum. The kind of sustained multi-year currency trends that characterised the 1990s and 2000s have become a thing of the past as central banks deploy verbal (and the threat of actual) intervention to manage exchange rates within relatively narrow corridors. This change in landscape has become so extreme that anti-momentum currency trades have been started to become consistent winners. The post-COVID-19 currency markets have been dominated by a lurch lower in the US dollar that threatened to break that pattern: on a broad trade-weighted basis, the dollar index is down around 10% since the March highs with the Federal Reserve’s framework review providing the latest catalyst.

This week brought the first serious pushback against that trend from the ECB. Philip Lane, the central bank’s chief economist said the “euro-dollar rate does matter”. Sternly worded stuff, indeed! More revealing, a number of his colleagues on the Governing Council, under the veil of anonymity provided by an FT article, followed up with even stronger comments: the strengthening of the euro is a “growing concern” and “worrisome”. These kind of comments hark back to the days when Jean-Claude Trichet, former ECB president, used to bemoan “brutal” FX moves.
 
The market seems to have taken this as an indication that 1.20 is some kind of line-in-the-sand for the single currency. For that to be effective, the ECB will soon need to back up words with action. The ECB is obviously heavily constrained in its ability to cut interest rates further, but we anticipate an extension of the quantitative easing programme to be announced in the next few months. That won’t be a big surprise to the market, but should help to keep a lid on government funding costs in the periphery and tame the recent burst of euro strength, in our view.
 
The urgency of addressing the situation will have been underlined by some exceptionally weak European inflation data this week. European headline inflation dropped back below zero for the first time since 2016. On a core basis, HICP inflation dropped to the lowest level on record at just 0.4%. There are exceptional circumstances associated with the timing of summer sales, but these are the kind of numbers that will bring an inflation-targeting central banker out in a cold sweat. With the ECB looking dangerously like Old Mother Hubbard (with a bare policy cupboard) we think that staying short European inflation is a strategy likely to benefit from a consistent fundamental tailwind. *For illustrative purposes only. The above information does not constitute a recommendation to buy or sell any security.

A useful article from Legal & General’s Asset Allocation team with a focus on technology stocks, a vaccine for COVID-19 and the recent change in tack from the European Central Bank.

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

Charlotte Ennis

08/09/2020


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Invesco – Weekly Investment Update

Please see below an article published by Invesco today, which provides their insights to recent market performance:

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

07/09/2020

Team No Comments

Brooks Macdonald – Weekly Market Commentary

Please see below an article published yesterday (02/09/2020) by Brooks Macdonald, which outlines their latest views on markets:

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

02/09/2020

Team No Comments

Brewin Dolphin – Markets in a Minute Update

Please see this week’s Markets in a Minute update from Brewin Dolphin published yesterday (12/08/2020) and received late last night.

Please continue to check back for our regular blog posts for a variety of market and economic updates from a range of leading investment houses and fund managers, plus our own original content and views.

Andrew Lloyd

12/08/2020

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A.J. Bell – Property Fund Article

Please see below an article published by A.J. Bell yesterday, outlining why the reduced liquidity in property funds is not necessarily a bad thing:

Thanks to the introduction of technology, a competitive landscape for products and platforms and the general faster pace of 21st century life we have all got used to the idea of being to buy and sell our investments whenever we want.

The idea of giving six months’ notice to exit an open-ended property fund, a key recommendation put forward by regulator the Financial Conduct Authority in its latest response to the problems in this space (3 Aug), seems extremely onerous.

However, it is probably a move in the right sort of direction. Most open-ended property funds have been suspended anyway since March amid uncertainty over the valuation of their assets thanks to the Covid-19 pandemic.

Expectations of being able to buy and sell units in a fund which invests in an asset class which can take weeks or even months to sell was always liable to throw up problems.

These were particularly acute in the financial crisis and after the Brexit referendum, when facing a wave of redemptions as investors looked to sell out of the funds, managers ran out of cash and the funds had to be suspended.

THE DIFFERENCE BETWEEN TRADING AND INVESTING

Selling an asset during a period of intense volatility, when the kinds of liquidity issues seen with property funds are most likely to crop up, is not likely to be a good idea.

And while six months might seem like a hell of a time to wait, for an investor with a long-term horizon it is really the blink of an eye.

There are two main ways of profiting from the financial markets. The first is to buy and hold assets with the aim of achieving a reasonable and sustainable return. The second, higher risk approach, is to trade in and out of assets for a quick profit.

Only someone pursuing the former strategy could accurately be described as an ‘investor’ as opposed to a ‘trader’.

The biggest downside of the proposed 180-day notice period from this author’s perspective is that appears you would agree to sell at a price which you would only discover when the notice period came to an end.

If you want more flexibility and crucially transparency there are other options. You could buy a real estate investment trust or other property-related trust.

As these trade on the stock market you can buy and sell more or less whenever you like at a price you can see immediately but you also need to accept that trusts may trade at a discount to their net asset value, particularly in difficult markets.

As our clients are investors, not traders, we do not see this as an issue and generally the exposure to Commercial Property is nominal when you look at the average portfolio.

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

07/08/2020

Team No Comments

SEI Strategic Portfolios: May 2020 Monthly Commentary

Please see below the May edition of SEI’s monthly market commentary received today (11/06/2020):

Global equity markets continued to rally in May, based on expectations that the economic impact of the global pandemic will be limited to a few quarters.

Executive Summary

  • Global financial markets continued their sharp rallies in May, albeit short of their remarkable April rebounds. The “risk-on” sentiment came amid a push by local governments to slowly reverse lockdowns of non-essential economic activity; the promising news of progress made in the race to develop COVID-19 vaccines; and the sustained extraordinary support of central banks.
  • Equities around much of the world experienced a choppy first half of May that ultimately gave way to a strong second half for the month. However, mainland Chinese and Hong Kong shares were outliers; both came under pressure as the month progressed, with the latter finishing the period with a steep loss. European and US shares generated solid monthly performance, while UK shares delivered more subdued gains.
  • Government-bond rates followed divergent paths from country to country. They mostly declined for UK gilts, yet increased for those with the longest maturities, while they increased across all maturities for eurozone government-bonds. As for US Treasurys, short- and long-term rates increased as intermediate-term rates declined for the month.
  • Considering the stability-focused Strategic Portfolios, relative returns were boosted by overweights to economically sensitive debt, including corporate bonds, selected emerging markets, as well as peripheral Eurozone debt. Consistent with its design, the Global Managed Volatility Equities fund lagged in a rising equity market but was able to provide meaningful risk reduction.
  • For the growth-focused Strategic Portfolios, some of the challenges faced by value managers in recent quarters continued to ease somewhat in May, with several periods of stronger returns potentially indicating a bigger rotation. Our core investment case for SEI’s overweight to this area remains the same: extreme relative valuations between the most expensive and cheapest parts of the market. SEI further believes that the post-crisis environment may provide further support for this positioning, given the huge stimulus being provided.

Market Overview

  • In the UK, the Chancellor of the Exchequer Rishi Sunak announced his intention to extend the government’s mortgage-payment holiday beyond June as its initial three-month timeframe approached. As of mid-May, UK banks had granted these repayment holiday terms to 1.7 million homeowners.
  • The Bank of England’s (BoE) Monetary Policy Committee held course following its 7 May meeting, keeping the Bank Rate at 0.1% and reiterating a commitment to purchase £200 billion in gilts and investment-grade corporate debt. The central bank’s May policy statement cited data that pointed to a significant drop in household consumption and plummeting expectations for sales and business investment during the second quarter.
  • Sharp contractions in manufacturing and services conditions appeared to slow across the UK, eurozone and US during May, but remained far from returning to growth. The UK economy shrank by 5.8% during March, representing the largest monthly decline in more than 20 years of UK gross domestic product (GDP) measurements2. Economic activity contracted by 2% over the first quarter of 2020. The UK claimant count (which measures the number of people claiming unemployment benefits) jumped to 5.8% in April from 3.5% in March. Retail sales in the UK fell in April by 18.1% from the prior month and by 22.6% from a year earlier.
  • In mid-May, the European Commission put forward a proposal for nearly €2 trillion across the EU, with €750 million devoted to recovery efforts and another €1.1 trillion to budgets over the next seven years. The European Central Bank (ECB) did not meet to address monetary policy in May. Germany’s constitutional court ruled during May that the ECB must produce justification for the legality of its bond-buying programme, in order to determine whether the Bundesbank could continue to participate.
  • The eurozone contracted by -3.8% during the first quarter and -3.2% over the one-year period. Construction output dropped -14.2% in March after slipping just -0.5% in February. Loans to nonfinancial corporations climbed by 6.6% in April, following an increase of 5.4% in March, continuing a corporate-credit bounce from February’s ebb.
  • Towards the end of May, the House of Representatives passed an additional $3 trillion in COVID-19 relief funds, but the legislation is held up in the Senate with unclear prospects for approval. Legislation passed the US Congress in early June that would extend the period during which companies can spend loan proceeds and remain eligible for loan forgiveness.
  • The increasingly tense US-China relationship was further stressed in May by a US push for more transparency in the ownership of US-listed Chinese companies and the US government’s barring of certain Chinese holdings from its retirement plans. China, for its part, imposed an 80% tariff on all barley imported from Australia over the next five years in an apparent response to the Australian government’s call for an independent inquiry into the origins of COVID-19.
  • The US Federal Open Market Committee held no meeting in May. As part of its crisis-period response, the Fed began buying corporate bond exchange-traded funds on 12 May to support secondarymarket liquidity. Fed Chair Jerome Powell announced near the end of May that the central bank’s Main Street Lending Program would be operational within days.
  • US consumer spending fell by 13.6% during April, registering the sharpest one-month decline since the data series began in 19593. New jobless claims for US unemployment benefits declined from more than 3 million per week in early May to about 2 million later in the month. Nearly 15 million US credit card bills went unpaid during April, and more than 8% of US mortgages were in forbearance as of mid-May. US GDP declined by an annualised 5% during the first quarter of 2020, the largest quarterly decline since the final three months of 2008.

Selected Asset Class Commentary

  • Global Fixed Income: During the month, the building block benefited from an overweight to peripheral Eurozone countries, overweights to Mexican and Colombian local rates, and off benchmark exposures to corporate credit and US Treasury inflation-protected securities (TIPS). Alliance Bernstein’s overweight to peripheral Europe contributed. Off-benchmark exposure to credit, mortgage credit risk transfers and US TIPS also helped. Wellington struggled on an underweight to the euro and overweight to the yen. A duration overweight in the US further detracted.
  • Global Managed Volatility Equities: The building block achieved meaningful risk reduction in May, but struggled on the back of pronounced style headwinds to low-volatility names and unfavourable overweights to consumer staples, utilities and health care. An underweight to mega-cap stocks was beneficial. Wells Fargo Asset Management fared better against style headwinds during the month, benefiting from greater diversity exposure and its momentum bias. LSV Asset Management’s value bias suffered most. Its exposure to cheaper low-volatility names was amplified by stock-specific disappointments in US biotechnology and insurance.
  • Global Equities: Overall market leadership remained unchanged in May; however a strong rotation in the middle of the month was also in evidence, was not quite enough to change the overall monthly results, but sufficient to challenge investors’ complacency in expensive growth stocks. With low volatility being the biggest laggard over the month, LSV’s results detracted the most at the Fund level. US value manager Poplar struggled with both style headwinds and sector positioning, as well as poor stock specifics in the technology sector. Towle, also a US value manager, was a significant contributor, benefiting from its bias towards smaller and higher risk stocks. Maj Invest, a global value manager, also outperformed due to similar positioning. Momentum managers, both Lazard and Intech, continued benefiting from the established trend favouring profitability and growth and contributed accordingly.

Manager Changes

  • Macquarie Investment Management (Macquarie) was removed from the Emerging Markets Equity building block in May. Macquarie’s strategy does not align with SEI’s alpha-source framework. Alpha refers to returns in excess of a given investment’s benchmark. Active investment managers seek to exploit various factors or sources of alpha in order to add value.

Outlook

  • The sudden and widespread stop in economic activity has never before been experienced on such a scale. The ultimate impact on GDP is truly anybody’s guess. The first quarter of 2020 saw an annualised decline of 5% in the US. The second quarter will likely be one for the record books; as of late May, Wall Street economists forecasted a quarter-to-quarter annualised decline exceeding 30%.
  • National governments have been quick to respond. All central banks are in crisis-fighting mode, having learned valuable lessons during the 2008-to-2009 great financial crisis, re-establishing unconventional bond-buying programmes and creating some new facilities to expand the types of accepted collateral in order to extend cash to companies in need of liquid assets.
  • The Fed and other leading central banks have moved with an alacrity and forcefulness that we find commendable. But central banks cannot single-handedly support this economic shutdown. In our view, fiscal policy—in the form of direct income support, tax deferrals, loan guarantees, and outright bailouts of industries badly damaged by the halt of economic activity—must be the prime tool used to address this crisis.
  • The fiscal response is occurring with a speed and decisiveness seldom seen in history. The US Congress passed a series of COVID-19 relief bills that easily topped 10% of GDP. Other developed countries have pursued a similar strategy of massive income support and liquidity injections. Italy, the European epicentre of the virus, will be particularly hard-pressed to do all that is necessary to stabilise its economy; its government debt-to-GDP ratio is already well above that of other major European countries.
  • In our view, a financial crisis can be averted in Europe if the ECB backs up the debt. This is now-or never time for the EU and eurozone. The stronger countries must come to the aid of the weaker, or else face an intensified popular backlash that could threaten the unity of the economic zone.
  • The onslaught of developments presented by the spread of COVID-19 has forced financial markets to recalibrate prices sharply as expectations about different industries and the overall economy shift quickly. Investors should gain some reassurance, however, from the fact that an earnings recession caused by virus-containment measures is generally only expected to last a couple quarters or so. If market prices are based on a long-term, multi-year expectation, then this fallout should represent a relatively small part of the market’s forward-looking focus.
  • Only time will tell whether markets have sufficiently discounted the pain that lies ahead. Investors should be cognisant of the fact that earnings estimates will likely come down hard over the next two quarters. These waterfall declines in earnings could still drag equities down with them. It all depends on how willing investors are to look beyond the valley. Markets should prove resilient if there is a common belief that fiscal and monetary responses to the crisis thus far will successfully prop up the global economy.
  • Right now, as always, we are focused on trying to deliver as diversified a portfolio as possible to all of our investors, regardless of their risk tolerances. We’re considering the known risks inherent to the capital markets as well as the uncertainty that comes with any long-term investing plan, such as the black swan we’ve encountered in 2020.
  • At SEI, we build and maintain long-term-oriented portfolios by being attuned to evolving relationships between asset classes. SEI views its strategies as robust and built to handle the kinds of challenges presented in today’s environment. At a portfolio level, we encourage investors to stay diversified and avoid short-term trading in these volatile markets.

SEI is a global provider of investment processing, investment management, and investment operations solutions. We believe the best way to keep up to date with the general market consensus in this rapidly changing market is to seek out and take on board the opinions of a diverse and expansive range of high-quality fund managers.

This has always been our approach to views on the market even pre-pandemic. Although the views across the board have generally recurring themes, it is important to see a wide range of views to hear consistent messages and see ‘the bigger picture’. 

Paul Green

11/06/2020

Team No Comments

Prudential PruFund Growth update

Last Thursday afternoon (21/05/2020) we had an update from Parit Jakhria of Prudential’s Treasury & Investment Office (TIO).  Parit is the Director for Long Term Investment Strategy at the TIO and his role is to lay out the long-term investment views and select assets for the multi asset fund at Prudential that includes PruFund Growth and With Profits funds.  The assets managed by Parit and the TIO value at circa £170 billion.

In an investment context, long term is 10 years plus.  I often hear about the TIO focusing on 15 years.  Short term is 0 to 5 years and medium term is 5 to 10 years.  One of the benefits of the scale of Prudential’s Multi Asset funds is that they can afford to invest with a long-term focus and not be concerned with liquidity issues.  Buying illiquid assets can help generate higher returns.

Parit commented that we have had 2 to 3 decades of globalisation and now this may decline slightly, and we could move more towards regional blocks, Europe (inc. UK), US, Asia etc.  This means that it’s more important to remain globally diversified.

Prudential’s TIO follow this process for investing:

  1. Capital markets assumptions
  2. Capital market modelling
  3. Portfolio construction
  4. Strategic asset allocation

This process is really useful in uncertain times.  The TIO look at a whole range of potential scenarios and on that basis, they are relatively positive.  The modelling is done on Prudential’s own unique inhouse system GeneSIS.

How are the TIO investing?

Their equity investment overall has increased with additional investment in the UK, Asia, Japan, Global Emerging Markets, China and a new investment in India.  Fixed Interest has seen a reduction overall.  They invested in African and Asian debt and now have a new Emerging Market debt allocation too.

Summary

I was awaiting written information from Prudential confirming their thoughts as outlined on Thursday afternoon, but they tend to be a little slower in issuing a written market briefing.

From my point of view the long-term asset allocation is positive and it’s good to see it when you have spent c 16 years looking at the strength and depth of their multi asset research that they are investing for growth over the long term.

Please note that this does not mean that the short-term volatility is over.  We may still experience further bouts of short-term volatility as we deal with the virus and try and get the economy working properly again.  Other news flow will impact on markets too, US/China, Brexit Trade Deals and US politics for example.

Please note that the above is based on my notes and interpretation of what Prudential said and can not be relied on.  Investments can (and obviously do) go up and down in value.

One of the key messages we hear repeatedly is to remain invested.  This is important.

Steve Speed

26/05/2020