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AJ Bell – The outlook for FTSE 100 dividends in 2021

Please see article below from AJ Bell received yesterday – 20/12/2020.

The outlook for FTSE 100 dividends in 2021

The blue chip index’s dividends are expected to rebound 18% after a 20% drop in 2020

Thursday 17 Dec 2020 Author: Russ Mould

It is unlikely that too many investors will make listening to more announcements from regulators one of their New Year’s resolutions, but no-one could accuse the Prudential Regulation Authority (PRA) of playing Scrooge, at least not this December.

Granted, the PRA may have wounded a few income-seekers’ portfolios with its declaration in late March that the Big Five FTSE 100 banks should not pay dividends (or run any share buyback programmes) in calendar 2020.

The lenders responded immediately by cancelling their planned final payments for 2019, keeping £9.2 billion in cash on their balance sheets. Further possible distributions have been withheld, to deprive income seekers of a further £6.5 billion, based on the payments made for the second and third quarters in 2019.

However, the PRA has now relented and granted permission to Barclays (BARC), HSBC (HSBA), Lloyds (LLOY), NatWest (NWG) and Standard Chartered (STAN) to return to cash to shareholders in calendar 2021.

While caps and limits are in place, this still represents good news for those investors who are seeking income from UK equities. The consensus analysts’ forecast of a combined £5.4 billion in dividend increases from banks underpins the estimate of an aggregate £10.9 billion improvement in the FTSE 100’s payout for 2021 to a total of £70.8 billion.

That £70.8 billion figure is, in turn, enough for a 3.8% dividend yield on the FTSE 100. While it is not up there with the 4.5%-plus analysts were hoping for a year ago (and that after a 15% fall on the FTSE 100 to add capital insult to income injury), it may help to provide some sort of valuation support for the headline index.

Banking on the lenders

However, not everyone will be convinced that the 3.8% yield number is reliable, or sufficient compensation given the potential risks that come with the UK market, in terms of Brexit, the ongoing pandemic and the potentially brittle nature of the economic upturn, given the degree of support that the Bank of England and the Government are having to pump in to try and keep the show on the road.

Analysts are not expecting 2021’s profits or dividends to return to the pre-pandemic levels of 2018 or 2019, to suggest they are not going overboard. But four fifths of 2021’s expected £10.9 billion increase in overall FTSE 100 dividends is forecast to come from just three sectors, the form of financials, miners and consumer discretionary. All of this trio could do with an economic tailwind if they are to live up to such expectations.

If the economy offers little or no assistance – or even hinders – then these forecasts could find themselves exposed to the downside. Moreover, the banks must still contend with the margin-crushing effects of the Bank of England’s zero interest rate and quantitative easing policies, while the Government’s apparent desire to increasingly use them as a tool for lending and keeping debt off its own balance sheet adds to the risk of weaker returns and higher loan provisions.

Concentration risk

Helpfully for those of a nervous disposition, only one of the big five – HSBC – is forecast to be among 2021’s top 20 dividend payers by value within the FTSE 100. Barclays is the next lender in the forecast rankings, at 21st.

Nevertheless, investors must again assess the concentration risk which has dogged those who have sought income from the UK stock market for some years. Ten stocks are forecast to pay dividends worth £32.3 billion, or 54% of the forecast total for 2020. The top 20 are expected to generate 75% of the total index’s payout, at £44.8 billion.

Anyone who believes the UK stock market is cheap on a yield basis, and is looking to buy individual stocks, glean access via a passive index tracker or even buy a UK equity income fund, needs to have a good understanding of, and strong view on, those 20 names in particular.

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

Charlotte Ennis

21/12/2020

Team No Comments

Brooks Macdonald – Investment Bulletin

Please see below investment bulletin from Brooks Macdonald received today – 18/12/2020.

What has happened

The swinging of the risk pendulum continues with positivity around Brexit, Stimulus and Vaccinations driving markets to fresh all-time/post-pandemic highs yesterday. The feeling of seasonal goodwill faded somewhat as we came into today, however.

Brexit…

This week has been characterised by reports that both the EU and UK legislative bodies were being prepared for an extraordinary series of sessions to ratify a Brexit deal. Overnight however UK PM Johnson and EC President von der Leyen both had a call which concluded that ‘differences remain’. Sterling, after being on a strong run but still within its tight 1.09-1.11 range versus the Euro, is feeling downbeat as investors get increasingly tired of trying to interpret policy from bluster. A new deadline is appearing from the EU to force negotiations to a conclusion with the European Parliament’s Conference of Presidents saying that they would organise an extraordinary session of Parliament as long as an agreement was reached on Sunday. The stakes are high enough on both sides that no one is going to walk away from a compromise reached on Monday morning, but time is very tight and not much Brexit no deal planning can take place within industry given Christmas’s immediacy.

US Stimulus Talks

It wasn’t all gloom and doom yesterday with stimulus talks progressing albeit at a slow pace. Senate Majority Leader McConnell and the White House said that a deal was close as a government shutdown at midnight tonight looms. There appears to be little appetite for last minute brinkmanship on this given the change of guard at the White House but also the precarious economic situation caused by COVID. The current bill is $900bn which contains a large number of the previously discussed measures but predictably excludes state and local aid. One fly in the ointment could be Pat Toomey, a Republican senator from Pennsylvania, who has sought to insert a provision in the stimulus legislation that would prevent the Fed from automatically reviving some several emergency credit facilities that are due to expire at the end of the year. Without this provision the presumed Treasury Secretary Yellen could have restarted the facilities without Congressional approval. One to watch

What does Brooks Macdonald think

It is rather disappointing that the two pieces of unfinished business remain unfinished as the Daily Investment Bulletin packs up for Christmas but it is in many ways apt given how Brexit and post-May US Stimulus have taken up many column inches with little legislation to show for it. Next year will be dominated by the interplay of vaccines reopening economies and short term economic restrictions and hopefully one of the above will be sorted for our return at the start of January…

Source: Bloomberg as at 18/12/20

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

Charlotte Ennis

18/12/2020

Team No Comments

Year in Review: A Turbulent 2020 Yields Bright Spots for 2021

Please see below article recently published by the Head Economist of Commercial Banking at JP Morgan. It focuses on the disruptive effect that the pandemic has had on markets and industry this year, with a positive reflection on how adaptable the economy has proven to be.

Spring shutdowns brought economic shocks: In March, the pandemic abruptly ended the longest U.S. economic expansion in history. However, the economy showed its underlying strength in the face of an unprecedented crisis that immediately produced:

  • Headline unemployment of 15%-20%, the highest since the Great Depression.
  • Workplace closures keeping approximately 50 million workers at home.
  • A 15% contraction in the nation’s economic output, marking the worst quarter in U.S. history.

Fortunately, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) likely prevented the sharp contraction from becoming a prolonged financial crisis.

  • Low interest rates allowed Congress and the administration to authorize the release of up to $4.7 trillion of deficit-financed relief spending while the Federal Reserve’s asset purchase program helped bond markets absorb the surging federal deficit without crowding out private lending.
  • The Paycheck Protection Program kept workers on the payrolls of businesses temporarily shut down by the pandemic, likely stemming the tide of layoffs.
  • With inflation falling just short of the Federal Reserve’s 2% target, there was little obstacle to dropping the short-term interest rate target to zero, making credit available to struggling businesses.
  • Stimulus spending created a $2.5 trillion jump in retail bank deposits as the household savings rate rose from 8% to 33%.

Over the summer, the economy proved adaptable: Daily life may have been severely disrupted, but most economic activity soon adapted to the new normal.

  • The pandemic struck at a time of maturing e-commerce and telecommuting technologies, allowing large segments of the economy to continue operating safely.
  • Some sectors, like residential construction, capital goods production and real estate saw strong growth following the COVID-19 contraction with new home sales up 50% over pre-pandemic levels.
  • Trade flows also saw a rapid recovery, with imported consumer goods leading the way. Steady demand from American consumers helped stabilize Asia’s industrializing economies.
  • U.S. aggregate output moved within four percentage points of regaining its pre-pandemic trajectory, a remarkable rebound considering COVID-19’s ongoing disruptions.

Autumn came, and some sectors were still struggling: Booming real estate and capital goods markets may have obscured more persistent weaknesses in the economy.

  • Air travel remained significantly depressed as passengers continued to delay trips, creating a ripple effect through the hospitality and tourism industries.
  • Energy exploration has fallen sharply along with oil prices. The North American rig count has dropped by more than half over the past year.
  • However, the unemployment rate fell to 6.7% in November, down from spring’s double-digit levels. COVID-19 vaccine approvals could likely speed this trajectory.

Winter could bring crosscurrents: COVID-19 cases are rising with the possibility of further state and local shutdowns that could reverse some of the year’s economic gains.

  • Cases were increasing going into the holiday period, suggesting that new restrictions on high-risk settings could be coming.
  • However, optimism surrounding potential vaccines is growing. If approval and distribution run smoothly, some experts say the pandemic could be contained as early as the first half of 2021. This could make dislocations from any wintertime shutdowns temporary.
  • A sustained rise in household savings implies that consumers are holding nearly $1 trillion in pent-up demand awaiting full reopening of the economy.  
  • The forward-looking equities market appears to be pricing in a return to normal next year. Investors are confident that historically high profitability and strong global growth will resume driving the market in 2021.

The bottom line

So far, COVID-19’s economic impact hasn’t resembled a typical recession. Though GDP has rebounded close to pre-pandemic levels, the job market still has significant ground to cover. A full economic recovery likely won’t be possible until an effective vaccine is widely distributed and the virus is contained.

We will continue to study market analysis with a keen interest as we enter the New Year. Please check in again with us soon.

Happy Christmas. Stay safe.

Chloe

18/12/2020

Team No Comments

Brooks McDonald Daily Investment Bulletin

Please see below for the Daily Investment Bulletin from Brooks McDonald, received by us today 17/12/2020:

What has happened

The Federal Reserve had their final rate setting meeting of the year and were eager to reassure markets that quantitative easing would remain until the economy had improved substantially. Whilst markets initially wavered over the lack of further measures they eventually settled largely unchanged.

Last Fed meeting of 2020

The Federal Reserve has been responsible for a large number of the blockbuster stimulus headlines over 2020 but those hoping for another round of accommodation were disappointed. The committee stressed that it would continue with the current pace of quantitative easing until ‘substantial further progress’ had been achieved towards their inflation and employment targets. There was some change to the 2023 interest rate expectations with one member showing a hike that year and also to the 2023 inflation level expectations where 4 members pointed to a small overshoot of the 2% target. Of course, a small overshoot would not pose a problem for the bank given it has unveiled average inflation rate targeting earlier in the year which will give them additional room if needed.

Update on unfinished business

The tone around Brexit talks improved again yesterday with sterling seeing further strength but remaining in the 1.09-1.11 band versus the Euro that it has been maintaining despite the high jinks of recent weeks. EC President von der Leyen said yesterday that ‘there is a path to an agreement now’ but reports suggest that fisheries remain a stumbling block. Rumours are circulating that Parliament is readying to return early next week to vote on a deal which is also supporting the UK currency. Meanwhile US Fiscal Stimulus talks continue amidst a positive tone, but the spectre of Christmas is nearing so there is a narrowing path to pass through Congress. The more contentious $160bn bill appears to have been predictably side-lined but the more substantial package seems to have the support of both sides.

What does Brooks Macdonald think

Economic data over the last few days has seen beats in Europe (specifically the compositive PMIs) and misses from the US on retail sales. This highlights how difficult it is for economists to calculate activity during periods where restrictions are gradually tightening, and consumer behaviour is shifting. The miss in US retail sales does provide further impetus for fiscal stimulus however and markets shrugging this off reflects hope that this may provide a catalyst for support rather than be a sign of things to come.

Regular daily updates like these are a useful method of frequently updating your holistic view of the markets, especially given the way the market is rapidly changing by the day with Coronavirus and Brexit.  

Please continue to utilise these blogs to help inform your own views of the markets.

Stay safe and well.

Paul Green

17/12/2020

Team No Comments

Jupiter Asset Management Outlook: All change but stay diversified

Please see the below 2021 Covid Impact themed outlook from Jupiter Asset Management:

Looking to 2021 and considering the lasting impact of Covid-19, the mountains of debt left in its wake and how stock and bond investors have differing views. Through it all, long-term investors, commensurate with their risk appetite, are best served with a diversified portfolio.

As the year closes, equity indices, especially those in the US, are chasing all-time highs. That could have been written a year ago. What a year! Who would have thought within three months of writing the 2020 outlook, the world would be turned up-side down by Covid-19, entire populations would be locked down, the global economy would be comprehensively trashed, central banks and governments would have to make the most significant monetary and fiscal interventions in history to keep the show on the road and by the end of March, global indices (including the technology-heavy NASDAQ) would have lost a third of their value? Therein lies the inherent risk of writing crystal ball-gazing ‘outlook’ pieces!

But taking the plunge, what of the future? Covid-19 will still be dominating events in 2021. With much of the western world battling a second or third viral wave at the end of 2020, the various pipeline vaccines cannot come too quickly for some semblance of normal social behaviour to resume. Not surprisingly markets reacted strongly to the Pfizer/BioNTec vaccine announcement. But post-vaccine ‘normal’ will not be pre-Covid ‘normal’; too much water has passed under too many bridges. GDP growth will recover, but national balance sheets are a mess and eventually the burgeoning debt mountains are going to have to be tackled, though whether through growth, inflation, taxation or austerity remains a moot point.

The Politics of Covid

But change is perhaps more profound. Like it or not Covid has become deeply politicised; many see it is a catalyst for a different future. In many ways it is easier to predict what the future will not be rather than what it will be. There is no re-set button and we simply erase 2020 as if it never happened; societal norms are shifting and moreover they are expected to shift. It extends to the corporate world where stakeholders with their invested human, regulatory or commercial capital are increasingly prioritised over shareholders and their financial capital.

From an investment standpoint, superficially equities have withstood much bad news and uncertainty albeit with a strong dose of volatility. However, there has been a pronounced bifurcation in performance between ‘growth’ companies and the Covid winners, and everything else. So-called ‘value’ companies have been out of favour for a considerable time but as economies begin to recover, perhaps those which are economically sensitive will enjoy an enduring period in the limelight again.

‘Hard-Nosed Pragmatists’

If equity investors are optimists, bond investors are hard-nosed pragmatists, if not pessimists. As lenders, whether to treasuries or companies, they have only two preoccupations: first, will they get their money back on the bond’s redemption date and second, are they being adequately compensated over the duration of their investment to reflect the risk the borrower defaults. Near-term the inflation risk remains benign thanks to slack economies and surplus capacity. As national governments’ Covid recovery extend-and-pretend support schemes eventually recede and the oversupply of labour and capital narrows as economic recovery progresses, opinion is divided whether accelerating money supply through longer-term strategic fiscal stimulus packages risks inflationary pressures to which central banks feel the need to respond with higher interest rates. The past decade suggests structural deflationary pressures may have the upper hand.

Alongside the shifting sands created by Covid, ramifications also weigh from Brexit and the US election. But in this complex environment awash with uncertainties, we believe long-term investors, commensurate with their risk appetite, are best served with a diversified portfolio comprising different asset classes and geographic exposures, as well as blending different investment styles.

This is another one of the many 2021 outlooks we have shared recently from a number of different fund managers, this time with a main focus on the impact of Covid.

Over the course of the next year, as the pandemic reaches its end point as the mass vaccination programme is rolled out, we will see what the lasting impact really is.

Please keep checking back for more outlooks and blog content from a variety of fund managers and our own input.

Andrew Lloyd

16/12/2020

Team No Comments

Brewin Dolphin – Markets in a Minute

Please below the latest ‘Markets in a Minute’ update from Brewin Dolphin – received yesterday evening 15/12/2020

The rally in global equities took a pause last week in the absence of a new US stimulus deal and worsening rates of Covid-19 infections, which are requiring more lockdowns. In the UK, Brexit has weighed on the pound which helped the FTSE100 outperform in relative terms, although it still lost ground. The more domestically focused FTSE250, however fell more sharply, as hopes of a Brexit trade deal appeared to fade at the end of last week.

Last week’s markets performance*

  • FTSE100: -0.05%
  • S&P500: -0.96%
  • Dow: -0.56%
  • Nasdaq: -0.69%
  • Dax: -1.38%
  • Hang Seng: -1.22%
  • Shanghai Composite: -2.82%
  • Nikkei: -0.36%

*Data for week to close of business on Friday 11 December.

A mixed bag to start the week

Monday saw a mixed performance on equity markets. Most Asian markets rose as investors focused on the vaccine rollout and strong economic data out of China.

However, after a strong start, UK and US markets finished mostly lower as London and New York faced more stringent coronavirus lockdowns amid a continuing surge in case numbers. Severe lockdowns were also announced in Germany, the Netherlands and the Czech Republic, highlighting the near-term threats to economic activity. The FTSE100 closed down by 0.23% at 6,531.83.

In the US, only the Nasdaq finished in positive territory on Monday, rising 0.50% to 12,440.04. And despite signs of a possible breakthrough on stimulus negotiations, the Dow fell by 0.62% to 29,861.55, and the S&P500 dropped 0.44% to 3,647.49.

In Europe there was a more positive mood among investors as the UK and EU agreed to keep trying to hammer out a Brexit trade deal past Sunday’s deadline. The growing optimism that a deal could be done saw markets rise across the continent.

The Euro STOXX 600 gained 0.44% to 391.85, while the German Dax closed up by 0.83% and the Spanish Ibex 35 gained 0.96% to 8,140.80. In the UK, the more domestically focused FTSE250 index closed up by 0.72% on the news.

US stimulus and Brexit hopes increase chance of a Santa rally

There is a chance of a ‘Santa rally’ in the run up to Christmas but bad news headlines are a risk. Additionally, very strong equity performance like we saw in November can prompt some rebalancing at the end of each quarter which may see a reversal from equities back into bonds.

But, generally speaking, December is a time when the wind is in the market’s sails and it’s January that has seen the sell offs.

Supportive of this view, there was positive news overnight on Monday regarding a new US stimulus proposal totalling $748bn. Although smaller than the Democrats would have liked, it looks to have much broader support in Congress. There now appears a genuine appetite to get a deal done before the end of the year, which could avoid a cliff-edge for millions of Americans who were due to see their unemployment benefits cut. That could now be avoided, which would be a boon to markets. The risk, however, is that worsening virus news and widespread lockdowns could sour the mood.

UK and EU investors move back to bonds

That is certainly what we saw signs of at the end of last week as equities suffered a modest setback. None of the reasons should have been a surprise; we have known the Brexit transition period was ending this month; we have known that US Covid-19 infections would likely require more lockdowns; and we could see the labour market would soften if that happened.

So far, markets have been pretty resilient in the face of these risks, which is rational given that they are likely to pass within a matter of months, if not weeks. But it is notable how strong sovereign bond markets have been over the past week, moving back towards their all-time lows in terms of yield. It’s also notable that it is European yields (including the UK) that remain tight. This indicates that investors are becoming more risk averse, and the reason is Brexit.

Source: Thomson Reuters Eikon, Brewin Dolphin

Progress on level playing field and effect on the pound

On Monday there was a more upbeat tone, especially from the EU, as they suggested that negotiations were now focusing on the ‘architecture’ of a deal that would solve the sticking points on competition.

Brussels had wanted the right to impose unilateral tariffs on Britain if the UK failed to match EU rules as they evolved, since this could distort competition.

The EU has now dropped this demand and instead talks are continuing on the mechanism by which tariffs could be applied, possibly by binding arbitration.

President of the European Commission Ursula Von der Leyen and chief negotiator Michel Barnier both seem to believe a deal is possible. Barnier told EU ambassadors that fishing was now the last big obstacle to a deal.

The UK is downplaying any suggestion that it is backing down on the issue of fishing rights and quotas, although it is hard to tell how much of this is for show, and how much is genuine intransigence. Many observers will be hoping it is the former.

But even in the case of a ‘no deal’ outcome in the coming days, it is likely that there could be some form of ‘gentlemen’s agreement’ to prevent large-scale delays at the borders and buy both sides more time to negotiate a trade deal early next year. Indeed, the EU last week published proposed contingency measures in the event of no deal. If the UK agreed, it would involve essentially keeping current regulations in place for air travel and trucking, which would help avoid a lot of the chaos.

This helped the pound rise significantly on Monday, which suggests that the market is pricing in quite a bit of optimism about a positive outcome. This in turn means that, if there is a deal, the pound may rise modestly. But it also suggests that it is not pricing in a no-deal scenario, which could mean a substantial fall in Sterling if a deal cannot be reached.

This week’s ‘Markets in a Minute’ from Brewin Dolphin reflects on the US stimulus and Brexit news which has increased the chances of a ‘Santa rally’ in the run up to Christmas but worsening virus news and further lockdowns could put this at risk.

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

Charlotte Ennis

16/12/2020

Team No Comments

Weekly Market Commentary: Brexit, US Stimulus and Fed meetings the key focus for investors this week

Please see below weekly commentary received from Brooks Macdonald yesterday afternoon. The article provides market analysis as Brexit and US Stimulus deadlines pass with no significant progress made.

Brexit and US Stimulus deadlines pass without meaningful change

The Collins Dictionary defines a deadline as ‘a time or date before which a particular task must be finished or a particular thing must be done.’ With US Fiscal Stimulus and Brexit talks both hurtling through yet another pair of ‘deadlines’ at the end of last week, one can’t help feeling the 2021 edition needs some updating. 

Yesterday UK Prime Minister Johnson and European Commission President von der Leyen held a call followed by a joint statement confirming that the negotiating teams would continue to talk over the coming weeks. There were no new deadlines set but frankly with two and a half weeks to go until the end of the transition period, there really isn’t a need for manufactured urgency. The tone at a leader level is very much that both sides remain far apart but even if a deal is close this will be the language until the last moment. After a torrid week for sterling and UK domestic equities, we are seeing both bounce today but remaining below levels seen a few weeks ago when more hope was baked into UK sensitive valuations.

Congress is set to debate split stimulus bills as lawmakers attempt to break the deadlock

The big question this week will be whether the US can get a fiscal package over the line ahead of Christmas. In an attempt to break the deadlock, there are two bills going to Congress today – a $748bn package which contains the less contentious areas and a separate c. $160bn bill with the thorny topics such as state and local aid1. House Speaker Pelosi and Treasury Secretary Mnuchin are set to talk yet again to try to reach a compromise position.

This week sees the last Federal Reserve and Bank of England policy meetings of 2020

This week we see the final meetings of the Federal Reserve and Bank of England rate setting committees. The markets are not expecting any meaningful change in the US but for the language around quantitative easing to be ‘enhanced’ as the bank releases its latest Summary of Economic Projections. In the UK a similar meeting is expected, especially after the additional Quantitative Easing announced in the November meeting. 

Despite Christmas being just around the corner, there are some major macroeconomic events for investors to navigate through this week. Optimism has grown today around both US stimulus and Brexit, although this is from the low base set last Friday. The second half of December is traditionally a lower volume period for equities however, with COVID-19 restrictions changing working norms and the macro diary packed, the wind down will likely be delayed a further week. 

We will continue to publish market updates throughout the festive period, so please check in again with us soon.

Take care.

Chloe

15/12/2020

Team No Comments

Blackfinch Group Monday Market Update

Please see below for the latest Blackfinch Group Monday Market Update received by us today 14/12/2020:

UK COMMENTARY

  • Despite pushing past many self-imposed deadlines, talks continue over a potential Brexit deal. Boris Johnson has, however, suggested that a no-deal scenario remains the ‘most likely’ outcome.
  • UK gross domestic product (GDP) grew by 0.4% in October, 23.4% ahead of its low in April. However, this remains 7.9% below pre-pandemic levels.
  • The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased by £6.5 billion to £0.8 billion in the three months to October 2020, as imports grew by £14.3 billion and exports grew by a lesser £7.8 billion
  • The Halifax House Price Index rose 1.2% month-on-month in November. Data showed that house prices were 7.6% higher in November than the previous year, the highest year-on-year gain since 2016.
  • Market research group Kantar released grocery market share data for the period ending November 29th, indicating the largest month ever for the grocery market, with £10.9bn spent in stores and online. Data showed that the average British household has spent over £4,200 on groceries this year.

US COMMENTARY

  • Talks continue over a further stimulus package, with the initial deadline of the 11th December extended. Multiple Federal support schemes designed to help the unemployed and to protect renters from eviction, are due to expire in the new year.
  • Figures to the 5th December showed that 853,000 Americans filed for unemployment, the highest level in eight weeks, as new lockdown measures began in multiple states
  • It’s believed that the US government is preparing to sanction a number of Chinese administration officials for their perceived undemocratic actions in the Hong Kong election

EUROPE COMMENTARY

  • The European Central Bank (ECB) has increased the size of its COVID-19 stimulus package by €500bn, as well as agreeing a nine-month extension. In a speech announcing the measures, the bank’s president Christine Lagarde commented that sufficient herd immunity may be reached by the end of 2021 to allow the economy to function under more normal circumstances.

COVID-19 COMMENTARY

  • The first COVID-19 vaccines were rolled out in the UK, with the US expected to follow suit next week
  • Researchers conclude that the vaccine in development by Astrazeneca and Oxford University is 70% effective based on trials of over 20,000 people
  • Sanofi and Glaxosmithkline suffered a setback in their vaccine research, which is expected to push the timeline for deployment to the second half of 2021, should their candidate receive the necessary approvals

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

14/12/2020

Team No Comments

Brooks Macdonald Investment Bulletin

Please see the below market commentary from Brooks Macdonald received today:

What has happened

The Collins dictionary defines a deadline as ‘a time or date before which a particular task must be finished or a particular thing must be done.’ With US Fiscal Stimulus and Brexit talks both hurtling through yet another pair of ‘deadlines’ at the end of last week one can’t help feeling the 2021 edition needs some updating.

Brexit

Yesterday UK PM Johnson and EC President von der Leyen held a call followed by a joint statement confirming that the negotiating teams would continue to talk over the coming weeks. There were no new deadlines set but frankly with 2 ½ weeks to go until the end of the transition period there really isn’t a need for manufactured urgency. The tone at a leader level is very much that both sides remain far apart but even if a deal is close this will be the language until the last moment. After a torrid week for sterling and UK domestic equities we are seeing both bounce today but remaining below levels seen a few weeks ago when more hope was baked into UK sensitive valuations.

Central Banks and Stimulus

This week we see the final meetings of the Federal Reserve and Bank of England rate setting committees. The markets are not expecting any meaningful change in the US but for the language around quantitative easing to be ‘enhanced’ as the bank releases its latest Summary of Economic Projections. In the UK a similar meeting is expected, especially after the additional QE announced in the November meeting. The big question this week will be whether the US can get a fiscal package over the line ahead of Christmas. In an attempt to break the deadlock, there are two bills going to Congress today, a $748bn package which contains the less contentious areas and a separate c. $160bn bill with the thorny topics such as state and local aid. House Speaker Pelosi and Treasury Secretary Mnuchin are set to talk yet again to try to reach a compromise position.

What does Brooks Macdonald think

Despite Christmas being just around the corner there are some major macroeconomic events for investors to navigate through this week. Optimism has grown today around both US stimulus and Brexit although this is from the low base set last Friday. The second half of December is traditionally a lower volume period for equities however with COVID restrictions changing working norms and the macro diary packed, the wind down will likely be delayed a further week.

It is definitely a more interesting time of the year than usual with the Pandemic and Brexit negotiations.

Please keep checking back for more blog content and investment outlooks from us.

Andrew Lloyd

14/12/2020

Team No Comments

AJ Bell – What is the yield curve telling advisers and clients?

Please see below investment weekly article from AJ Bell received 13/12/2020.

No investment indicator is infallible – if it were, none of us would be working and all of us would be playing the markets (only to find, ultimately, that there would be nothing in which to invest except each other’s investments).

“The curve in the UK stands at its steepest since August 2019, while in the US, the yield premium offered by ten-year US Treasuries relative to two-year paper is at its highest since October 2017.”

However, one which is generally held to stand the test of time is the yield curve, so advisers and clients may be intrigued to learn that the curve in the UK stands at its steepest since August 2019, while in the US, the yield premium offered by ten-year US Treasuries relative to two-year paper is at its highest since October 2017.

In theory, this is the bond markets’ way of saying that an economic upturn, and possibly inflation, are coming. This is a view which has considerable implications for financial markets and asset allocation strategies overall, as well as fund and specific stock selection strategies.

Big switch

In general terms, there are four types of yield curve, using the difference in yield between two- and ten-year Government bonds as a benchmark.

  • Normal. Here, yield on the ten-year paper is higher than that of the two-year. Advisers and clients demand compensation for the additional eight years to maturity, as this means there is more time for things to go wrong, with inflation, interest rate increases or default being the main three dangers.
  • Steep. In this case, long-term yields rise more quickly than near-term ones as investors look to price in an acceleration in economic growth and interest rate increases. Advisers and clients fear being locked into low rates and demand greater compensation for owning longer-dated paper.
  • Flat. This is where the bond market is unsure how to proceed. Yields on two- and ten-year paper are the same as the economy transitions from downturn to upturn or upturn to downturn.
  • Inverted. Here, bond markets fear an economic slowdown or recession and the yield on longer-dated bonds drops below that of shorter-term papers. This happens because advisers and clients price in future interest rate cuts in response to the slowdown and a drop in coupons on bonds issued by Governments in the future.

12-to-18 months ago, all of the talk was of how yield curves were inverting and how that could have been warning of trouble ahead (though no-one would pretend that fixed-income markets saw the pandemic or subsequent recession coming).

“The yield curve is now steepening in the US, a trend which characterised the early stages of the bull equity markets that began in 1982, 1990, 2002 and 2009.”

The picture is quite different now. Buoyed by further momentum, the race for a COVID-19 vaccine and further fiscal stimulus from Congress, combined with further monetary largesse from the US Federal Reserve, the yield curve is now steepening in the US, a trend which characterised the early stages of the bull equity markets that began in 1982, 1990, 2002 and 2009.

The yield curve stands at its steepest in over three years

Source: Refinitiv data

Admittedly, Japan’s experiences since 1990 suggest the yield curve can be a poor predictor of economic activity but the yield curve has had its uses in the UK. Inverted yield curves in 2000 and 2007 helped to call the top for the FTSE All-Share index but a clear steepening marked the beginning of bull runs in 1998, 2003 and in the early stages of the last decade.

The UK yield curve is also steepening

Source: Refinitiv data

Style council

There may be further implications below the level of headline indices. Banking stocks, for example, have been crushed by central banks’ efforts to keep yields low (and, by implication, yield curves flat) as they try to help governments fund their burgeoning debts. A steeper curve could boost banks’ net interest margins, earnings power, share prices and ability to pay dividends. This could be influential in the UK market, for example, where the FTSE 100’s Big Five banks are so integral to earnings and dividend growth forecasts.

Banking stocks could well benefit from a steeper yield curve

Source: Refinitiv data

“A steeper yield curve, hinting as it does at a stronger economy and inflation, seems to favour cyclical earnings growth over secular earnings growth – or, to put it more crudely, ‘value’ as a style over ‘growth’ – at least if history is any guide.”

Even more intriguingly, a steeper yield curve, hinting as it does at a stronger economy and inflation, seems to favour cyclical earnings growth over secular earnings growth – or, to put it more crudely, ‘value’ as a style over ‘growth’ – at least if history is any guide.

As this column has noted (30 October 2020), value has tried to forge a recovery relative to growth, using the ratio of the price of the Invesco QQQ Trust, an exchange-traded fund (ETF) designed to track and deliver the performance of the heavyweight NASDAQ 100 index (minus its running costs), relative to the iShares Russell 2000 Value ETF, as a benchmark.

‘Value’ seems to be taking its lead from a steeper curve too

Source: Refinitiv data

Some are wondering if this trade is already exhausted. Looking back at 2000, you could argue that it has hardly begun, such was the violence of the switch from growth to value as the former began to falter under the twin weights of lofty valuations and earnings disappointment.

Russ Mould, AJ Bell Investment Director.

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

Charlotte Ennis

14/12/2020