News

Please see this week’s Markets in a Minute update from Brewin Dolphin:

With one week left until the US Election, the surge of Covid infections worldwide, and the Brexit deadline looming we don’t expect the market volatility to subside just yet!

It’s still going to be a bumpy ride as we approach the end of the year.

Stay posted for our regular updates as we continue to keep you informed of market developments.

Andrew Lloyd

28/10/2020

Please see below an article received late yesterday afternoon from Legal & General Investment Managers which provides their latest market views:

As mentioned in my LGIM blog last week, one of the key focuses remains the outcome of the upcoming U.S. election, more so than the ongoing Covid-19 pandemic and it looks like China is nearly back pre-pandemic activity. If stricter lock-down measures are introduced, it is anticipated that these are likely to have a lesser impact on markets than they did in Spring. This is mainly because markets didn’t fully recover from the impact of the first lockdown.

The good news here is that if markets do decline again, this will present a good buying opportunity for investors.

Opportunity is still out there for investors, but it remains important to have a long-term (minimum 5 years) view and a diversified portfolio, which is spread across a number of regions and sectors in order to benefit from these opportunities. The longer the investment term, the better.

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

27/10/2020

Please see latest ‘investment intelligence update’ from Invesco received today 26/10/2020.

Monday 26 October 2020 – update

The contrast between those economies seeing a severe re-escalation in the virus and those that have escaped relatively unscathed was clear to see in economic news flow last week. China’s economy continues to recover strongly (see chart of week), while declining flash PMIs in Europe, led by the more exposed Services sector, highlighted the increasing economic pressures being felt in the region from renewed containment measures. The EZ’s Composite PMI is now in contraction territory, below 50, and although it remains just above 50 (52.9) in the UK, it is well below the 59.1 level seen in August’s survey. And it is only likely to get worse as the full impact of lockdown measures start to hit home. A difficult winter ahead for these economies. Fortunately for the global economy, the US continues to defy any virus-related concerns with last week’s PMI hitting a post-pandemic high, led by the Service sector. Notwithstanding that, further fiscal support is deemed necessary there to underpin the recovery and bridge the gap to the widespread availability of an effective vaccine. The UK has already been forced down that route, with further policy support announced last week for businesses and the labour market. Alongside the virus, politics continues to hog the limelight. The US elections are just over a week away, while closer to home Brexit negotiations appear to be back on track. The outcome of both remains uncertain, bringing with it the potential for increased market volatility in coming weeks.

Against this backdrop, equity markets struggled to make any headway last week. The MSCI ACWI declined slightly, with EMs comfortably ahead of DMs. Japan was the only gainer amongst the major DM markets. Small Caps marginally outperformed. Value and Cyclicals were the best style factors. IT had a rare poor week and Financials a rare strong one, the latter helped by higher bond yields. It was a mixed week for UK equities, with decent gains from mid and small caps being offset by large cap weakness, with the FTSE 100 hitting its lowest level for five months. Improved Brexit sentiment was the key driver here, with a strengthening £ a headwind for the latter.

Government bond yields had a difficult week, with yields moving higher across the board. 10yr USTs hit their highest level (0.85%) since June but remain over 100bp below their YTD starting level (1.91%). Expectations of further stimulus was the culprit here. Improved Brexit sentiment was behind higher Gilts. Weakness in government bonds weighed on IG credit, even with spreads hitting post-virus lows. HY performed better, with yields edging lower. 

In currency markets the US$ weakened across the board. £ had its strongest day since March during the week on Brexit optimism. Copper benefitted from a weaker US$ as well as strong economic news flow from China, hitting a YTD high during the week. Gold remained below $1900. Oil weakened on expectations of increased Libyan output and virus-related demand concerns.

Market performance last week (%)

Past performance is not a guide to future returns. Sources: Datastream as at 25 October 2020. See important information for details of the indices used.¹

YTD market performance and YTD low/high (%)

Past performance is not a guide to future returns. Sources: Datastream as at 25 October 2020. See important information for details of the indices used.¹

Chart of the week: China Real GDP and forecasts (yoy%)

Source: Datastream as at 23 October 2020. Forecasts are red dashed line based on Bloomberg median quarterly yoy%.

• China announced its Q3 GDP number last week. While these numbers always need to be treated with a degree of caution given the speed in which the second largest economy in the world can produce its “final” estimate (the US by contrast does not produce its first estimate until late October and its final estimate until late December) they are the only official numbers available as to understand the overall state of the Chinese economy. And for 2020 at least the lack of an official growth target means there has been less political pressure to massage the figures this year.
• In Q3 the economy grew by 4.9%yoy. This was disappointing relative to the consensus expectation of 5.5%, due to below trend growth in the services sector, but was still an acceleration from Q2’s 3.2%yoy. A “good” pandemic, substantial fiscal and monetary support and strong foreign demand have clearly been important contributors to this rapid recovery back towards “normality”. And a continuation of the recovery in Q4 should take real GDP growth back to its pre-virus 6% trend. This puts the median consensus expectation for 2020 at 2.1% growth, which would leave China as the only major economy to see positive growth this year (by contrast the US is expected to contract by 4% and the EZ by 7.9%).
• The strong relative performance of the Chinese economy has had a positive knock-on effect on the performance of Chinese assets. The MSCI China and MSCI China A Onshore (large and mid cap stocks just listed on Chinese domestic exchanges) have returned 20% and 17% respectively, while the Renminbi has risen 4% against both the US$ and China’s preferred Trade Weighted measure (CFETS RMB index).
• In terms of longer-term prospects, Chinese leaders will discuss the next 5 Year Plan (2021- 2025) at the 5th Party Plenum meeting this week. The main theme of this FYP will be the “dual circulation” strategy, which calls for more emphasis on the domestic economy as a source of growth, compared to earlier export-driven growth strategies. This is against a backdrop of a steady economic slowdown, driven by an ageing population and slower productivity growth, rising geo-political tensions and a slowing down of globalization. Key to this will be a focus on boosting domestic consumption and further market opening measures. While any growth target is unlikely to be announced until March next year, expectations are that it will be in the range of 5-5.5%, which compares to the 6.5% target in the previous FYP.

Key economic data in the week ahead

• A fairly busy week on the data front, with the highlights being Central Bank meetings in the EZ and Japan alongside the first look at GDP performance in the former as well as the US. Outside the data news flow, developments on the virus front, the final run-in to the US elections and Brexit progress will all be closely watched by investors.
• Preliminary US Q3 GDP data is published on Thursday and forecast at an annualised 31.9%qoq – the sharpest rebound in the history of post-WW2 GDP. However, this will still see the overall economy behind where it was at the end of March, following the 31.4%qoq contraction in Q2. On Wednesday the Conference Board Consumer Confidence index is expected to show a slim improvement in October at 101.9 from September’s 101.8, but this would still leave it well below the 130+ level at the start of the year. The impact of the virus on consumer confidence remains plain to see. Following last week’s surprise drop in US Initial Jobless Claims at 787k, this week is forecast at 785k when released on Thursday.
• In the UK, the housing market takes centre stage, with Wednesday’s Nationwide House Price Index for October. House price inflation is expected to have slowed to 0.3%mom from 0.9%mom in September. Year-on-year house prices are estimated to have increased 5.2%yoy from 5.0%yoy. This would be the strongest growth since 2016. Mortgage Approvals for September on Thursday are expected to confirm the current robustness of the housing market, even if new approvals are forecast to be lower, at 76.1k from August’s 84.7k. This is still comfortably above the 60k 10-yr average pre-pandemic.
• The EZ publishes its first estimate of Q3 GDP on Friday. A strong rebound to 9.5%qoq is forecast, but again insufficient to redeem the -11.9%qoq drop of the previous quarter. Year-on-year this leaves growth at -7%, compared to -14.7% last quarter. On Thursday the ECB monetary policy meeting is expected to keep the policy stance unchanged, but the press conference should be of interest as ECB members discuss their updated economic outlook. The latest Inflation and Unemployment data is published on Friday. For the former, no improvement is expected in October, with Headline and Core forecast to remain at -0.3% and 0.2% respectively. The latter is expected to see a small uptick from 8.1% to 8.2% – still low in the context of the past decade – as government support schemes continue to underpin the labour market.
• The Bank of Japan meets on Thursday, with no change in policy expected there either. A busy day on Thursday also sees Industrial Production data for September, expected at 3%mom and -9.8%yoy, and September’s Unemployment numbers, where expectations are for 3.1% compared to 3% in August. The Jobs-to-Applicants ratio is likely to remain close to 1 – well below the 1.6x level seen at the start of the year. Retail Sales for September on Wednesday are forecast to show a significant -7.9%yoy drop from -1.9%yoy in August, but this is largely a function of consumers looking to beat the sales-tax hike in October 2019 rather than pandemic-related weakness.
• Official PMI data is released in China on Saturday. Following last week’s Q3 GDP results, the Manufacturing PMI for October is expected to continue to point to expansion, remaining at 51.8, while the Non-Manufacturing PMI is forecast to fall marginally to 52.8 from 53 in September.

A useful article from Invesco, reviewing current market issues and highlighting the key economic data in the week ahead.

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

Charlotte Ennis

26/10/2020

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

Please see below an interesting article published by the Association of Chartered Certified Accountants which explains how innate human behaviour effects investment decision-making.

Behavioural finance attempts to explain how decision makers take financial decisions in real life, and why their decisions might not appear to be rational every time and, therefore, have unpredictable consequences. This is in contrast to many traditional theories which assume investors make rational decisions.

One aspect to understand is the market paradox. This occurs because in order for markets to be efficient, investors have to believe that they are inefficient. This is because if investors believe markets are efficient, there would be no point in actively trading shares –which would mean that markets would not react efficiently to new information.

Herding refers to when investors buy or sell shares in a company or sector because many other investors have already done so. Explanations for investors following a herd instinct include social conformity, the desire not to act differently from others. Following a herd instinct may also be due to individual investors lacking the confidence to make their own judgements, believing that a large group of other investors cannot be wrong.

If many investors follow a herd instinct to buy shares in a certain sector. This can result in significant price rises for shares in that sector and lead to a stock market bubble.

There is also evidence to suggest that stock market ‘professionals’ often do not base their decisions on rational analysis. Studies have shown that there are traders in stock markets who do not base their decisions on fundamental analysis of company performance and prospects. They are known as noise traders. Characteristics associated with noise traders include making poorly timed decisions and following trends.

Some investors may have loss aversion, avoiding investments that have the risk of making losses, even though expected value analysis suggests that, in the long-term, they will make significant capital gains. Investors with loss aversion may also prefer to invest in companies that look likely to make stable, but low, profits, rather than companies that may make higher profits in some years but possibly losses in others.

There may be a momentum effect in stock markets. A period of rising share prices may result in a general feeling of optimism that prices will continue to rise and an increased willingness to invest in companies that show prospects for growth. If a momentum effect exists, then it is likely to lengthen periods of stock market boom or bust.

Behavioural finance shows that individuals may not necessarily make decisions on the basis of a rational analysis of all the information. This can lead to movements away from a fair price for an individual company’s shares, and the market as a whole to a period where share prices are collectively very high or low.

This insight is certainly food for thought. Please check in again with us soon for market updates and advice-related content.

Stay safe.

Chloe

22/10/2020