Please see below for Jupiter Fund Management’s latest Active Minds article, received by us this morning 20/11/2020:
Fund Manager, Value Equities
Has Value started the long journey back from the brink?
There has been a pronounced rotation from Growth into Value in recent days, an event which Dermot Murphy, Fund Manager, Value Equities pointed out has been very rare in the last few years.
In the UK, the names which suffered most during lockdown rallied hardest on Monday last week, but in many cases that momentum faded as the week went on. It was notable, however, that a UK-listed cruise company took the opportunity presented by the higher share price to issue a $1.5bn new equity issuance. Dermot would expect other companies to do similar over the coming weeks and months.
The rally broadened out over the course of last week, as companies that have struggled during lockdown despite being relatively insulated from the crisis caught more of the market’s attention. It’s important to note, said Dermot, that this rally in Value is just a drop in the ocean when it comes to the scale of the underperformance of Value seen in recent years. If this short rally is to turn into a longer-term trend, there is still a great deal of ground for Value to make up relative to Growth.
Rotation could get nasty over the tough winter
A divided US government following this month’s elections may accentuate the conflict between a difficult short-term outlook of rising Covid-19 cases and additional lockdowns in the US and Europe, and an optimistic medium-term view that includes the potential rollout of vaccines bringing freedom of movement and the release of pent-up demand, said James Novotny, Macro Analyst, Fixed Income.
Two runoff elections in January will decide which party controls the Senate, but a divided US Congress is now the base case, in James’s view. This means a smaller fiscal stimulus package and a longer wait for it to be rolled out and is a potential problem given the challenging winter period, he added.
James said many year-ahead investment outlooks seem willing to look through these difficult few months, envisioning a smooth transition as investors shift out of US assets and from growth into value. He worries there could be a nasty rotation, however, not as pain-free as some investors believe. There needs to be a certain level of economic growth to support this rotation at a time of possibly higher corporate bond yields and potentially less fiscal and central bank stimulus, he said.
Last week’s market moves were illuminating because they were so stark, he said. Many people were caught wrong-footed, having positions that supported a ‘QE-forever’ trade, and the volatility, including in the foreign exchange markets, was concerning. So too was the fact that the US breakevens, a market measure of inflation expectations has failed to respond to the election and vaccine news, and have languished well below the Federal Reserve’s (Fed) inflation targets, he said. This signals a clear need for more stimulus at a time when President Trump seems to be trying to make the transition to a Biden White House difficult, James said.
The Fed needs to do more, but its next open market committee meeting is mid-December, and it may be a long month. Against this backdrop, the dollar should remain weak despite sporadic risk-off periods, given the record twin deficits, James said. Looking ahead, US assets bear close watching, especially the dollar and US break-evens, for any signs that the move out of US assets can be more painless, and to see that central bank policy is loose enough.
Assistant Fund Manager, Emerging Markets
Chinese government draw a line in the sand with corporates
Interesting news in China, after the default of a flagship company in China’s drive for self-sufficiency in semiconductors, said Matthew Pigott, Assistant Fund Manager, Emerging Markets. This reminds us, in Matthew’s view, firstly that China’s attempts to pour money into its semiconductor industry will be a very long uphill battle.
Secondly it is a reminder that there are a lot of companies in China with a lot of debt and few prospects, so for the government to effectively say “even though you’re a tech company in a highly sensitive sector of strategic importance, we’re not going to stand behind you” has interesting implications for other corporates.
Matthew went on to talk about new competition regulation in the internet space, which is targeted at the e-commerce giants. The situation is complex, but the upshot is that the power of these tech mega caps will be checked. The biggest practical changes involved the banning of forced exclusivity arrangements and algorithm-based pricing. Shares in those stocks have been hit hard since the regulation was released, despite stellar 3Q results and record ‘Singles Day’ sales. Matthew said it is interesting that this regulation has come in at time when, as we’ve seen in other regions, the Growth/Value divergence in the market has shown signs of shifting.
Fund Manager, Japanese Equities
Stage was already set for a shift in market leadership
Dan Carter, Fund Manager, also highlighted the stylistic rotation that has happened in the market, with Value stocks performing well in Japan as well. What has been driving the Japanese market in recent days has been the likes of banks, insurers, autos and transport stocks.
On the flipside, the those business giving up returns in the market have been asset light, higher valuation businesses – stocks that are common to many growth-focused Japanese active equity funds as there has been a lot of crowding into a relatively small number of names.
With hindsight, this shift shouldn’t have come as a surprise, said Dan. When he looked at the operational performance of business, he could see that the stage was set for a rotation. Operating profits across the market are down about 30% in the first half of the accounting year, but that is nevertheless well ahead of what had been a very bearish consensus. Upward revisions have generally been concentrated in manufacturers e.g. transportation equipment and electric appliances – expectations for these sectors were so low that we were due a turnaround.
Fund Manager and Head of Credit Research, Fixed Income
No ‘long Covid’ for European banks
The Q3 results for European financials were better than expected, said Luca Evangelisti, Fund Manager and Head of Credit Research, with lower provisions and rising capital ratios as most banks had already front-loaded their provisions for Covid-related loans in the second quarter. European banks also reported that more borrowers than expected had recommenced their loan repayments following the Covid-related payment holidays.
That’s all good, said Luca but banks are clearly still in an artificial situation where they have been helped by job support schemes, government guarantees and moratoria on loan repayments. Although the ending of these would be likely to have some effect on banks’ margins in the first couple of quarters of 2021, the prospect of viable vaccines and a return to more normal economic activity should limit the impact of the crisis on banks’ balance sheets. Luca therefore believes banks are in a fundamentally strong position.
As for the vaccine news, subordinated financials and senior level debt rallied strongly as did bank shares. That said, the decoupling of bank equity to bank debt, particularly CoCos (contingent convertible bonds) remains remarkable. For example, European bank shares are down around 30% year-to-date whereas Additional Tier 1 debt is up around 3% over the same period. And while the European Central Bank could have used the vaccine news to change its accommodative stance, Christine Lagarde made it clear that the Bank still intends to announce further measures in December which should provide support to credit spreads and the wider market in general.
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