Please see article below from Jupiter Asset Management which provides their latest market views – received today 27/11/2020
Active Minds – 26 November 2020
James Moir – Analyst, UK Growth
The normalisation of UK politics has begun
James Moir, Equities Analyst, UK Growth, gave an update on how the UK market has reacted to news flow in November. The Covid crisis has had a particularly severe impact on the UK market, given the relatively high weighting to oil & gas, financials and miners. As such, it has rebounded more than most developed markets this month on the back of the positive vaccine developments.
Although the bounce back has been strong, James pointed out that sectors such as oil & gas and banks are still significantly down year-to-date. James gets the sense that there has been a bottoming out of assumptions for the energy stocks, while the absolute bear case for bank credit losses might be avoided now that vaccines are imminent.
In terms of style, it has undeniably been a good month for Value, but Growth stocks in the UK have nevertheless delivered absolute gains this month. In any case, the winners and losers from Covid haven’t neatly aligned with the Value/Growth divide, with James and the team identifying many companies they consider long-term Growth stocks that have been adversely impacted by Covid and have had a strong November.
Company news is fairly thin, given that this isn’t reporting season, but there have been a couple of M&A deals that are notable for being domestic-focused UK companies that are being acquired ahead of Brexit.
Turning to Brexit, James sees it as significant that a normalisation of UK politics appears to be underway. In the past month, the UK government has announced a 10-point plan on the environment, and increased the defence budget by almost 10%. Leaving the detail of this spending aside, James said it is important that the UK government is now being more active on priorities beyond Brexit, with many issues long overdue for being addressed, and that should be encouraging to all investors in the UK market.
Ivan Kralj – Assistant Fund Manager, Absolute Return
Is this the start of a prolonged rotation back into Value?
Ivan Kralj, Assistant Fund Manager, Absolute Return, shared his thoughts on the ‘Growth to Value’ rotation narrative. Although some of the daily moves over the past few weeks have been extraordinary, in magnitude and in the context of any longer timeframe, those moves were mere blips, said Ivan. He continues to see huge gaps between share price and valuation, and massive spreads between companies that are perceived as being ‘fit for the future’ which are trading on triple-digit P/E ratios and price-sale ratios above 30x, and those that are viewed as ‘boring’, asset-heavy companies which are trading on historically low single-digit P/Es and offering around 10% dividend yields.
So, why is this happening? As Value investors are facing large redemptions and are forced to liquidate positions, prices are being driven down. Ivan noted a recent academic paper that found how surprisingly price inelastic the stock market is, and that flows in and out of the market are having a significant effect on price – this seems to confirm that it’s liquidity rather than fundamentals that is driving many of today’s moves, said Ivan. However, he thinks it’s wise to assume that valuations will one day matter once again. Market experience over the past decade doesn’t mean that anything has fundamentally changed, even though valuations have been poor predictors of share prices over that period. There’s a century’s worth of quantitative and behavioural evidence that suggests investors tend to under-price stocks with the poorest prospects and over-price those with the most promising prospects.
While it’s too early to tell if a prolonged rotation back into Value stocks has begun, Ivan thinks Russell Napier’s recent essays provide the most compelling narrative in terms of potential catalysts. Napier argues we’re transitioning from a new era where governments are seizing the money creation mechanism from central banks, and they’re incentivising commercial banks to lend to businesses and consumers in the real economy, through various government-backed lending programmes. That should create money, potentially leading to inflation and nominal economic growth. In that scenario, said Ivan, if inflationary expectations were to change then Value stocks should do really well.
Patty Cao – Assistant Fund Manager, Emerging Markets Debt
Goldilocks scenario supports emerging market debt in 2021
The election of Joe Biden as US president has been positive for emerging markets (EM) in that it potentially reduces trade tensions and brings a more conciliatory foreign policy, and the vaccine news has also provided a boost, said Patty Cao, Assistant Fund Manager, Fixed Income.
Inflows have reached a three-month high in emerging market debt, and net flows have turned positive for the year. Last week saw inflows of $3.2 billion into the asset class, split evenly between local currency and hard currency, Patty said, citing JPMorgan data.
These trends should continue next year, in her view. The team is expecting a Goldilocks scenario (not too hot, not too cold) for EM, a year of repair and renewal. Economic growth should improve sharply, with China and India each forecast to expand by around 9%, and rebounds elsewhere as vaccines roll out and markets and economies come back to life.
There is a cyclical upswing in growth, and there is plenty of support from central banks across the globe, Patty said. This should keep the US dollar relatively weak and inflows into the asset class robust, which is supportive of asset prices. In her view it makes sense to stay bullish on EM credit, and local currency and sovereign debt.
Colin Croft – Fund Manager, Emerging Markets
Low cost, simpler vaccines are great news for emerging markets
As you would expect, the positive news flow around vaccines has been positive for Emerging Market (EM) equities, said Colin Croft, Fund Manager, Emerging Markets. The data from the Oxford University vaccine has been especially impactful, he said, as the relatively low cost and simpler logistics (the vaccine is stable at normal fridge temperatures) compared to the earlier announced results should help wider distribution across emerging markets.
This moves us towards a recovery scenario which ought, over the next 6-12 months, to drive outperformance of the most beaten down and economically sensitive sectors such as airlines and banks, said Colin. Some of the banks in emerging markets have been relatively resilient anyway, he highlighted, without having to raise equity and making significant upfront provisions early in the pandemic. This means that several of them are already showing a rapid rebound in earnings as provisions come down.
Colin also touched on the US election. As we inch towards a Biden presidency, Putin is one of only three major foreign leaders yet to congratulate him. There have been some worries that Russia might face the risk of more sanctions once Trump is gone, so last week Colin joined a call with a former US Ambassador, who is close to the Biden team and designed the current Russia sanctions regime back in 2014. His view was that Russia doesn’t face an immediate threat of new economic sanctions – while Biden was sceptical of Obama’s reset and is unlikely to try something similar, he is also unlikely to escalate sanctions without a fresh reason to do so.
So, a Biden presidency might not be as bad as feared for Russian assets – but the caveat is that this will depend on what Russia does – if they do cross certain lines again, then there would be a greater likelihood of better-targeted US action, that is better coordinated with allies, than under Trump. So Colin’s view is that if something does happen he’d be more inclined to turn bearish on Russia, but for the time being Biden shouldn’t necessarily be seen as a negative for Russian equities.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
A good update from Jupiter Asset Management’s fund managers, providing a useful insight into the markets.
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