Please see the below update from some of the Fund Managers at Jupiter Asset Management received earlier today:
Mark Nash
Fund Manager, Fixed Income
Markets take bad news in stride but need fiscal spending
Markets have run aground in the last few weeks as Covid-19 cases rise in Europe, including Germany, and in the US, and this second wave damages growth prospects, said Mark Nash, Fund Manager, Fixed Income.
The risk-on, reflation trade needs a continued upward trajectory in global growth and central bank support, he said. Central banks remain supportive, but what is lacking is fiscal stimulus, which is needed as a bridge to support growth through the winter before a vaccine arrives. There has been some negative news on a vaccine, with some experts reducing the likelihood of a significant vaccine rollout in Q1 to 45% from 75% previously, he added.
The market’s reaction to the negative news hasn’t been huge, however. The Treasuries market has weakened a little, but risk assets remain reasonably buoyant, and the dollar hasn’t softened, as would be expected in a risk-averse market, Mark said.
There hasn’t been the big risk-off move and dollar scramble seen in recent years when the market panics over dollar liquidity, and Mark highlighted a few reasons for the muted reaction: the Federal Reserve (Fed) is providing liquidity so access to dollars is easier. Also China is doing well, with growth coming from fiscal support, exports and rising consumer spending. This suggests to Mark a more even and sustainable recovery in China, and it’s helping the global economy, with the renminbi acting as a conduit to remove some dollar strength.
The US current account deficit is starting to bite, with the country consuming more than it is producing, and requiring more dollars to buy overseas goods. But as the Fed keeps rates low, overseas investors are less interested in buying US assets, also preventing dollar strengthening, and that’s quite a big structural change, Mark said.
If the bad news stops, Mark expects additional dollar weakness and a continuation of the Treasury market underperforming the rest of the world. He anticipates any risk-off moves as being reasonably shallow, however, and he expects there to be buying opportunities. Mark doesn’t expect an exaggerated move upward in the dollar that does much damage to the risk market, as the Fed would step in to prevent this and there will be more government fiscal support eventually.
Ross Teverson
Head of Strategy, Emerging Markets
Enablers reduce the guessing game in emerging tech trends
Ross Teverson, Head of Strategy, Emerging Markets, drew attention to what he calls the ‘tech enablers’ in emerging markets. These are companies that are key to a lot of the big changes happening in technology, because they supply key components or services to the headline-grabbing companies that get people excited in fields like the cloud, 5G, the Internet of Things and even electric vehicles.
Ross argued, however, that these companies differ from those more glamorous names in a few important ways. Not least is that their share price valuations are generally lower, but also because – as suppliers to entire sub-sectors of the industry – they can benefit whichever of their customers ultimately ends up winning the battle for the public’s wallets.
By way of example Ross highlighted the mobile phone handset market, which is seeing fierce competition, but where semiconductor companies can sell to the market as a whole regardless of which handset manufacturer is currently on top. The autos sector is another example, as clearly there are a lot of people very positive about the potential for electric vehicles (EVs), as reflected in the share price performance of dedicated EV auto firms this year.
A recent forecast from Morgan Stanley put EV penetration at 31% by 2030, although Ross’s own view is that is still too conservative a figure. We are not far from seeing the cost of an EV fall to that of a comparable internal combustion engine car, and all of the concerns people have about charging will begin to fall away as range improves, charge times decline and charging networks expand.
Picking the winner in the EV race from the legacy auto manufacturers or the pure EV newcomers is a process fraught with risk. From an investment standpoint Ross sees a more appealing opportunity in the ‘tech enablers’ serving the EV sector. This includes companies involved in, for example, mining raw materials for the batteries, making the batteries themselves, developing autonomous driving software, or providing testing equipment and services.
Paul Pulickal
Credit Analyst, Fixed Income
Active primary market for credit management services
Paul Pulickal, Credit Analyst, Fixed Income, explained how Covid-19 has impacted the credit management services space. The sector is made up of two primary operating models: debt purchasing, where businesses buy non-performing loans (NPLs) or assets from banks, utilities and telecoms at deep discounts to face value; and debt servicing, where businesses don’t own the underlying loan, but earn a fee on the collected amount on non-performing debt.
The larger operators in Europe tend to use a hybrid model – the servicing segment allows them the opportunity to survey the investment landscape without putting up capital straight away; once they understand the best collection strategy for a specific asset, then they tend to enter as buyers. These businesses have become an integral part of the market structure post-2008/9 when it allowed banks a way to deleverage their balance sheets.
In terms of Covid-19 disruption, we’ve seen real divergence in collection performance driven by the regional exposure, and therefore secured vs unsecured nature of the underlying assets, said Paul. On the secured side, these assets tend to be found in Southern Europe, where NPL markets are relatively young and there’s an existing stock of legacy NPLs that remains on bank balance sheets. Covid-19 lockdowns had the greatest impact on these assets due to closures of court systems and frozen real estate markets, as they often require some form of litigation to extract value.
On the other side are unsecured assets, which are more typically found in the UK and Northern Europe, which have better-developed NPL markets, under which consumers may sign up to payment plans or be offered a haircut on the value of the obligation as to accelerate a lump-sum payment. These assets have held up relatively well – they’ve not had problems with court closures, and there’s a backdrop of government support.
On the servicing side, there has been some marginal weakness as banks and other credit originators pass forbearance measures onto the underlying borrower. But the guidance seems to be for a strong pipeline – Europe not only has an oncoming NPL wave, but legacy issues to be worked out too, especially in Southern Europe. And though regulators’ measures have delayed NPL formation, at some point that insolvency phase will work its way through bank balance sheets, and these services and purchases are set to benefit, said Paul.
Moving into 2021, as the world returns to a more normalised cost base and NPL supply starts to pick up again, Paul expects re-leveraging and this is a key reason why he and the team think it is important for investors to be selective, but this is nevertheless an interesting sector given the opportunity set these businesses will have in the wake of the pandemic.
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.
Views from fund managers like this help us to get a handle on what is happening in the markets. We do expect the market volatility to continue as Covid-19 cases continue to surge in the UK and across Europe and with the US Election now less than 2 weeks away.
Please continue to check back for more updates as we help post brief and informative updates to help guide you through these challenging times.
Andrew Lloyd
23/10/2020