News

Please see below the latest ‘Investment Insight’ from AJ Bell received 18/10/2020.

Reasons why cryptocurrencies are creeping higher

Bitcoin is trading close to a 12-month high

Thursday 15 Oct 2020 Author: Russ Mould

The Federal Reserve Bank of Cleveland’s Loretta Mester has raised the prospect of Americans having an account with the Fed, into which the central bank could directly pump digital dollars, thus bypassing the banks as the main mechanism for quantitative easing (QE).

The European Central Bank has reportedly filed to trademark the term ‘digital euro’ as it assesses the pros and cons of digital currencies.

And the Bank of Japan is openly discussing what it calls central bank digital currency (CBDC), with work beginning in spring 2021 on issues such as resilience, ahead of trials with a limited number
of households.

To prevent a public panic the Bank of Japan continues to stress CBDCs will be used to complement, not supplement, paper money.

Supporters of such experiments will argue they offer another potentially useful tool in the central banker’s kitbox, as the existing policy suite of zero rates, QE, inflation targeting and so on struggles to deliver the growth and inflation the monetary and political authorities crave, to help them escape from their debt burdens.

Sceptics will wonder where this will lead next, with rampant money creation, to fund government debts, interest payments and spending plans, and inflation both possible consequences, unintentional or otherwise.

These doubters may be in the camp that warms to gold in such circumstances or even cryptocurrencies which, rather to this column’s surprise it must be said, refuse to go away.

Bouncing back

Bitcoin may still be trading well below its 2017 all-time high of $18,941 but it is making plenty of ground.

According to coinmarketcap.com, bitcoin’s total value is $210 billion, a fraction below its high for the calendar year. That figure is also pretty much double the value of the FTSE 100’s largest stock by market cap, AstraZeneca (AZN). The total crypto universe, which now comes to over 3,600 different counters, is currently valued at $361 billion according to the same website.

Some may see this as another reason to view financial markets as worryingly frothy, as a plentiful supply of liquidity from central banks and hopes for fiscal stimulus keep them bubbly.

Others will argue that cryptocurrencies’ return to favour supports the view that central bank policies are debasing existing currencies and merely one step down the path toward a reset of how fiat money works, with CBDC experiments the next logical development.

Perhaps Facebook’s work on its own blockchain-based payment system, Libra, is prompting central banks to get cracking on their own version.

Long arm of the law

Regulators are sceptical. Attempts to launch exchange-traded funds (ETFs) dedicated to tracking cryptocurrencies have foundered in the US and Britain’s Financial Conduct Authority has just banned the sale of derivatives and exchange-traded note trackers related to bitcoin to retail investors, citing ‘the inherent nature of the underlying assets, which means they have no reliable basis for valuation.’

No matter how sceptical many financial market watchdogs or participants may be, it can still be argued that if someone, somewhere thinks that cryptocurrencies have a value, then a value is what they have.

Questions over the cost of the bitcoin mining process, the level of mining and transaction fees and efficiency of cryptocurrencies as a payment system relative to cash, or existing credit and debit networks, will also deter many from using bitcoin, let alone treating it as an investable asset class.

Yet the cap on the supply of bitcoin to 21 million will continue to appeal to some investors as they see government deficits balloon and central banks draw up plans for digital currencies and seek out a place to preserve or even hide wealth.

Gold bugs may argue that bitcoin has no physical backing or practical use but critics of the precious metal will assert it is an inert element that generates no yield and is not in frequent use when investors pay for their weekly groceries, either.

Libertarians may also jump in at this point, citing how central bank-backed digital currencies could be the ultimate surveillance tool in any civilised country, let alone despotic, corrupt ones. As such, the battle lines between true believers and nocoiners (and gold bugs) remain drawn.

The ability to pay tax in cryptocurrency or even buy groceries would be a tectonic shift but that looks a long way away. For the moment, the former is having a better year of it than the latter.

The forced shift from cash to cashless payment during the current pandemic is unlikely to do the cause of digital currencies any harm, as more people become accustomed to using their card or mobile device to make a payment in person, let alone online.

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

Charlotte Ennis

19/10/2020

Please see below an article received late yesterday afternoon from Jupiter which provides their latest market views:

Global Emerging Markets

A land where banks can grow

Nick Payne, Fund Manager, Global Emerging Markets, highlighted the strong performance of emerging market equities this year, which are approximately back to their pre-Covid levels from earlier in the year. However, Nick wanted to talk about an area that has so far lagged behind: banks.

In contrast to developed markets, where banks are typically seen as mature, low growth businesses with low return on capital, in emerging markets the picture couldn’t be more different. There are around 2 billion people in the world without a bank account, the bulk of them living in emerging markets. Some of those are gaining access to financial markets through fintech solutions, but in emerging markets the traditional banks still have a big role to play, said Nick.

The ability to grow is the main thing that separates emerging market banks from their developed market peers. Nick used as an example the largest privately owned bank in India, with about 8% market share, that has the opportunity to capitalise upon the situation in rural India where there have been great strides made in building up a deposit base, but where banks are still in the early stages of lending to customers (the loan to deposit ratio is just 30%). Indeed, the bank’s CEO stressed that the potential opportunity is so large that at this stage they don’t need to go down the risk scale in order to achieve growth.

The underlying message for Nick is that there is still an enormous runway for growth for banks in emerging markets, and those that are strong enough to come through this crisis will emerge with their competitive positions enhanced. So while the high profile technology names understandably get a lot of attention at the moment, this is an alternative area that Nick sees as presenting a compelling long-term opportunity for emerging market investors, which the market should recognise as and when economies start to normalise.

Fixed Income

Finding pockets of value in Latin America

Risk sentiment in emerging markets has improved in October, following a volatile September, noted Alejandro di Bernardo, Credit Analyst, Emerging Market Debt. The market has turned more positive on a possible Biden win in the upcoming US election, in the belief that a higher fiscal deficit will translate into a weaker dollar, which would be positive for emerging markets.

In Latin America, Brazil is expected to post the lowest decline in growth – estimated at 5% for 2020 – largely thanks to a huge fiscal stimulus package, of over 15% of GDP. PMI activity, consumer confidence, and other industrial indicators are showing a V-shape recovery. On the other hand, however, the political backdrop remains a concern there. Growth relies on subsidies, which isn’t sustainable; and Brazilian debt to GDP is expected to reach about 95% by the end of the year. Alejandro and the team expect the Brazilian real to remain volatile, and in terms of positioning, they prefer to focus on exporters with US dollar revenues. Alejandro used the example of a Brazilian pulp & paper company, with a significant market share and strong operating margins; as the industry was considered ‘essential’, it never closed during lockdowns. So, Alejandro said it’s possible to get paid a premium to have exposure to strong BB exporters in the region.

It is the opposite scenario for Mexico. The country is expected to post the biggest decline in GDP in the region, falling 9%, largely due to a much more conservative approach to fiscal stimulus from the AMLO administration. Politics there are quite stable, but growth is lacking. In Mexico, the team prefers companies with exposure to the US, and investment grade miners that have exposure to copper and gold, where demand is likely to benefit from a Chinese recovery.

Looking forward to 2021, Alejandro and the team take a positive view on countries like Peru, Paraguay, Chile, Guatemala and Panama, which entered the pandemic with very low levels of debt, and which have room to provide fiscal stimulus. Even in countries with weaker macro, the team can still find pockets of value in the BB space, in companies where fundamentals have recovered.

UK Equity – Small & Mid Cap

How to approach three ‘unloved’ buckets in UK equities

Tim Service, Fund Manager, UK Small & Mid Cap, shared his views on how to approach three of the most “unloved” themes in the UK market: stocks affected by Brexit, Covid-19 and value/cyclical stocks.

He said each of these themes requires investors to be “humble” and accept that taking a strong view on the stocks is difficult as outcomes are unpredictable and heavily impacted by politics.

One way to play Brexit exposure is through a domestic sector that is understandable and has growth potential but is disadvantaged by uncertainty around the UK-EU negotiations, Tim said. Housebuilders fit this description – with a dozen or so companies operating in a land market that is much less competitive than it was in the last cycle. The sector trades on 1 to 1.3 times book value and should generate high-teen to 20-plus percent return on equity in a year’s time with a “good” Brexit, he said. Challenger banks may also benefit as their valuations have been held back by concerns about Brexit.

A way to approach the Covid-19 theme is through travel stocks, which have been sharply impacted by virus restrictions, with the most likely scenario being the eventual control of virus transmission in the western world, Tim noted. He prefers to focus on good businesses with solid balance sheets or companies they would support if a capital raising were needed, and with the ability to come through the next six to nine months in a stronger market position.

Some UK cyclical/value stocks may benefit if after the US election there is an increase in infrastructure spending or if there is a change in the inflation outlook. Industrials and aggregates, for example, would fit this description.

Gold and Silver

M&A in the gold mining sector could double

The gold sector has seen around $20bn of mergers and acquisitions this year and this may well double in the next 3-6 months, said Ned Naylor-Leyland, Head of Gold & Silver.

The crisis in depleting reserves among major gold miners has been apparent for decades, said Ned, but it’s taken firmly rising gold and silver prices to get the market to focus on the need for consolidation. Previously, unreasonably low spot prices prevented gold miners from engaging in the sufficient exploration and development needed to boost reserves.

In Ned’s view, we are now at a tipping point of an incoming wave of M&A in the sector and it is the discounted tier one gold miners that he thinks will benefit the most. Elsewhere, Ned pointed to Q3 reporting from silver miners as one to watch: will silver’s spectacular rise this year translate into company numbers? While the market isn’t yet willing to pay a sustainable $20 per ounce for silver, he thinks that is inevitable at some point in the future given the demand for silver in electronics is only going to increase due to powerful trends like the internet of things and clean energy technologies.

I think one of the key messages to take from the above is that opportunity is still out there for investors, but it remains important to have a diversified portfolio, which is spread across a number of regions and sectors in order to benefit from these opportunities. Having a long-term view when investing is imperative, you should not focus on short-term volatility.

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

16/10/2020

Please see below the latest ‘Markets in a Minute’ update from Brewin Dolphin received 13/10/2020.

Markets in a minute: Equity markets rally on Trump recovery, Biden lead, and hopes for stimulus deal

Most global equity markets made solid gains last week on hopes of a US stimulus deal, and following President Trump’s return to the White House after treatment for Covid-19.

Markets were also boosted by the increasing likelihood of a Joe Biden election victory. His lead in the polls is expanding, and although Democrats may raise corporate taxes and regulation, investors are encouraged by the party’s approach to job creation and wage growth. Biden’s lead may also mean there is less chance of a disputed election result.

Last week’s markets performance*

• FTSE100: +1.94%
• S&P500: +3.84%
• Dow: +3.26%
• Nasdaq: +4.55%
• Dax: +2.85%
• Hang Seng: 1.47%
• Nikkei: -0.75%

*Data for week to close of business on Friday 9 October.

FTSE100 lags as global markets rise at the start of the week

Most equity markets rose on Monday, with US indices powering ahead led by gains in big tech. As hopes faded for a new US stimulus deal ahead of the election, investors returned to the growth stocks that have proved so reliable during the pandemic and lockdowns. The Nasdaq closed up by 2.56% at 11,876.26, having been up by 4.1% at one point in intra-day trading. The Dow gained 0.88% and the S&P500 rose by 1.64%. Markets across Europe closed up by around 0.7%.

In the UK, the FTSE100 lost 0.25%, weighed down by a strengthening pound which rose on hopes of a Brexit deal. The more domestically focused FTSE250 closed up by 0.52%, despite yesterday’s introduction of a tiered system of localised lockdowns.
Those in the highest-risk areas could see a range of measures introduced, from bans on households mixing to closures of pubs, bars and gyms. Liverpool is currently the only city to be placed in the highest-risk tier. However, it appears tougher measures are on the way for a number of areas after Chris Whitty, the chief medical officer, said the basic “Tier 3” measures would not be enough to stop the virus spreading.

More UK stimulus

Rishi Sunak unveiled a watered-down furlough scheme for firms which are forced to close under local lockdowns. The government will pay two-thirds of employees’ salaries to a maximum of £2,100 per month. Companies will still need to pay national insurance and pension contributions. The scheme will begin on 1 November and will run for six months, with a review in January.
The announcement followed a disappointing set of GDP data for August that showed monthly growth of 2.1%, less than half the 4.6% rate expected by economists. High-frequency data, such as restaurant bookings, traffic and retail footfall, shows that activity slowed in September, which makes sense given the end of the ‘eat out to help out’ scheme.

US stimulus talks deadlocked

Talks between Democrats and Republicans in the US still appear at an impasse. Trump has given ground and agreed to a slightly larger stimulus package worth $1.8trn, but faces objections from his own party who want the bill capped at $1trn. It is worth noting, however, that the Democrats have already passed a $2.2trn plan. This could be implemented soon after election day if the Democrats gain control of both the House of Representatives, and the Senate, in a so-called ‘blue sweep’.

Brexit clock ticking

Talks resume today ahead of an EU summit this Thursday, when all member states will begin focusing on Brexit negotiations. Thursday is also the day that Boris Johnson has said he would walk away from talks if a deal was not in sight. It seems unlikely Johnson will turn his back on any prospect for a deal given the pressure he is under to reach a compromise, especially amid such intense criticism of his handling of the coronavirus.

Johnson has been on the phone to Macron and Merkel over the weekend in a bout of last-minute diplomacy. While some reports suggest state aid and dispute resolution are the key negotiation sticking points, others point to fishing rights, a topic on which France is particularly vocal. It may be surprising that fishing is such a deal-breaker, given that it accounts for only around 0.1% of UK GDP. But it is the lifeblood of many coastal communities and has an emblematic value beyond that which can be expressed in economic terms. Despite Johnson’s threat to walk away, Michel Barnier, the EU’s chief negotiator, has said talks will continue after Thursday and that a realistic deadline is in fact 31 October.

A duller dollar

Stephen Roach, former Head of Morgan Stanley’s Asian business, has suggested that the US dollar could decline by 35% as a result of global economic conditions. While we are also bearish on the dollar, we do not foresee such a drastic fall. We suspect the dollar will continue the gradual decline that we have been observing in the market.

Part of our negativity is based on the fact that the greenback has lost the interest-rate support that has held it up in recent years.

Source: Brewin Dolphin, Refinitiv Datastream

A useful article from Brewin Dolphin focusing on the UK, Rishi Sunak’s unveiling of a further UK stimulus package and exploring the reasons why, at the beginning of this week, the FTSE100 has lagged behind global markets.

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

Charlotte Ennis

14/10/2020

Please see below an article published earlier today from Blackfinch Investments, which outlines their latest views on markets across the world:

UK Commentary

US Commentary

Europe Commentary

Asia Commentary

Global Commentary

Based on the above it looks like things are potentially moving in the right direction, however, it is yet to be seen what impact today’s lockdown announcements from Boris will have on markets and the economy. I think it is fair to say that the overall recovery of industries and economies will drag into next year and even possibly the year after.

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

12/10/2020

Please see below an article received late yesterday afternoon from Jupiter which provides their latest market consensus:

Emerging Markets

Four key themes for emerging market investing 

Salman Siddiqui, Fund Manager, Global Emerging Markets, outlined four investment themes that excite him in emerging market (EM) equities. These include the digital transformation of EM businesses, as companies use technology to improve the overall customer experience, such as through a better website or payment platform – and Covid-19 has obviously accelerated that need. IT consulting companies should be well placed to benefit from that trend, he said.

The second theme is a consumption and lifestyle improvement in EM, just one manifestation of which is in the area of sports participation, said Salman. China has seen a massive increase in the number of marathons, for example, and this trend offers opportunities for sportswear manufacturers. The third theme is the ‘plumbing’ behind the scenes of the technology sector, including chipmakers and chip designers. As the world moves towards greater automation and greater connectivity, Salman sees these companies as becoming more and more critical.

Salman’s fourth theme, financial inclusion, is one he sees as particularly important in EM, where it is not only a financial opportunity but also a social opportunity to help communities. He notes that in South Africa, where 12 million people – a third of the adult population – are classified as ‘unbanked’, there’s a company that offers financial products to help drivers start minibus taxi businesses. 80% of its customers were previously financially excluded and would not have had access to credit. The company has created a tech-savvy business that operates profitably, serves the country’s thriving minibus industry and provides drivers with a potential pathway to avoid poverty, Salman said. This is an example of an investment opportunity that not only stacks up well from an ESG point of view, he said, but is also appealing on fundamentals, combining high return on invested capital, a moat to help it sustain those returns over time and the ability to compound those returns over time.

Value Equities

Addressing disruption and ESG concerns for Value stocks

Value, as a style of investing, continues to experience an historic period of underperformance relative to Growth, said Ben Whitmore, Head of Strategy, Value Equities. The reasons often cited for Value’s continued stay in the doldrums include issues around disruption, ESG and low (or zero) interest rates into perpetuity.

On disruption, Ben highlights that Value investing has coped with disruption on other occasions over the decades. He is keenly aware that at times of disruption some industries do not survive, but believes that Value opportunities remain in sectors that, although they face challenges, are not facing an existential crisis. Ben sees ESG risk as an investment risk and is keen to point out that investors should look beyond simple ESG scorecards, which can reward companies merely for disclosure and describe the past more than they do the present or future. He thinks it is important for investors to look deeper at the specifics of a situation. An example is Japanese equities, which in aggregate are undergoing a positive change in governance culture, historically an area of weakness. Mining is another example. It’s a sector that understandably raises various ESG question marks, but Ben pointed out that base metals will remain a key component of the global economy and that investors should actively engage with mining company management on issues such as staff working conditions and environmental impact, among other topics.

The past few years have been a grim period for the Value style. However, when Ben looks at the extreme levels of low valuation, the strong balance sheets that can be found, and a historical precedent that shows Value has tended to bounce back strongly from periods of extreme underperformance, he feels relatively optimistic about the outlook for Value.

Global Convertibles

Green bonds finally come to convertibles market

Although convertible bonds as an asset class have done well year-to date, this has been driven almost entirely by 100%-150% rises in the share prices of US technology and software services stocks, says Lee Manzi, Fund Manager, Multi-Asset. With their sky-high valuations and often less-than-robust balance sheets, these stocks present a high hurdle to investment for any strategy aiming for superior risk-adjusted returns.

Lee notes the market is waking up to this risk. The latest Bank of America Merrill Lynch survey shows global fund managers have started to trim their tech equity positions and move into cyclical companies such as industrials. This can also be seen in the convertibles new issues market, which for much of 2020 has been dominated by tech firms coming to market, partly because high share prices reduce the probability of the bonds having to convert and dilute equity.

More recently, Lee has observed new issues coming from a much broader range of recovery-oriented companies such as airlines, retail and travel/cruise lines. The quantity of new issues is currently 80% higher than a year ago and the convertibles market is finally seeing the issuance of Green convertibles (e.g. by a giant French utility company), which have accounted for around 5% of new issues year-to-date designated as green bonds. Looking ahead, Lee expects these to make up an even greater proportion of new issues as the green bond market continues to grow and diversify. 

Absolute Return

Earnings momentum won’t guarantee returns

Last week, European equities outperformed global equities, partly driven by re-ratings, but more interestingly also by earnings momentum, said Tommy Kristoffersen, Equities Analyst, Absolute Return. A couple of months ago, Tommy noticed that those sectors with the biggest earnings downgrades were actually outperforming. More recently, however, that relationship has reversed into a more intuitive one, with earnings changes positively correlated with relative sector performance for the majority of sectors

Over time, there’s actually little evidence that picking the stocks with the best earnings momentum beats the market, said Tommy. Research from Liberum showed that a strategy of investing in the top quartile of UK stocks with best earnings momentum, and rebalancing monthly, would have generated the same returns over the last 20 years as investing in the bottom quartile. There’s one important caveat though: the bottom decile for earnings momentum dramatically underperformed other groups, generating a negative return over 20 years. So, in other words, it’s ok to identify stocks that are generating lots of earnings momentum, but the most crucial thing is to avoid the losers.

You might think, perhaps, that the best way to avoid the losers is to stay on top of earnings forecasts from sell-side analysts. However, research in the Review of Quantitative Finance and Accounting showed between 1995 and 2013, following sell-side earning upgrades failed to generate significant returns. Additional research shows that analysts consistently overestimate earnings growth potential, and the higher their forecasts, the less accurately they reflect the subsequent real earnings growth.

Combining these insights, Tommy thinks investors should be selective about the research they consume; and, if we want to improve on unreliable forecasts, we should be more pessimistic. We must acknowledge that, when stock prices are aligned with sell-side earnings expectations, all other things being equal, the market is likely overpaying for expected earnings.

In practice, this means greater scepticism about some of the big market themes like e-commerce, said Tommy. Several stocks playing on this mega trend have the boldest sell-side assumptions when it comes to long-term earnings growth. Given what we know about the inaccuracy of exuberant earnings growth forecasts and just how badly things can turn for these sorts of companies, several of these stocks seem like prime candidates for some investor pessimism.

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

09/10/2020