News

Please see below for the usual Monday Market Update from Blackfinch:

UK COMMENTARY

• The seasonally-adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose again in August to a 30-month high of 55.2, albeit marginally below the earlier flash estimate.
• The Services PMI figure for August was also revised downwards from its earlier estimate and showed that the rate of job losses across the sector was at its highest since May.
• Manufacturing PMI fell to 54.6 in August, with the lack of new work to replace completed contracts seemingly causing the slowdown. The data, however, shows that the industry remains in expansion territory.
• The Bank of England reports that mortgage approvals for house purchases rose to 66,281 in July, up from 39,902 in June and 9,285 in May.
• Figures from Nationwide show that house prices in August rose at their fastest rate in 16 years.
• Four UK housebuilders are being investigated by the Competition and Markets Authority following ‘troubling evidence’ over the way in which leasehold properties were sold.
• Alex Brazier, the Bank of England executive director for Financial Stability Strategy and Risk, tells MPs that it isn’t possible for all office workers to return to their desks, commenting that public health issues, public transport capacity and the ability for offices to comply with COVID-safe guidelines are all significant factors that need to be considered. Brazier adds that ‘we should expect a more phased return, depending on the public health outcomes we see in the coming weeks and months’.

US COMMENTARY

• Talks restart between US Treasury Secretary Steven Mnuchin and House of Representatives Speaker Nancy Pelosi over a fresh round of stimulus, with the former stating that a ‘bipartisan agreement still should be reached’.
• Non-farm payrolls show that the US added 1.4mln job in August, in line with expectations, with the unemployment rate falling to 8.4%.
• Weekly jobs data shows that there were 881,000 new jobless claims, against estimates of 940,000.
• Tech stocks fall as investors reconsider the valuations of those stocks that have rallied hard over the last few months.

ASIA COMMENTARY

• The private Caixin survey shows that Chinese manufacturing activity in August rose at its fastest pace in nearly 10 years.

COVID-19 COMMENTARY

• The New York Times reports that the US Centers for Disease Control (CDC) has notified public health officials in all 50 states to prepare to distribute a COVID-19 vaccine to health care workers and other high-risk groups as soon as late October or early November. The report suggests that the CDC has laid out the requirements for shipping, mixing, storage and administration of two vaccine candidates, currently only referred to as Vaccine A and Vaccine B.

Please continue to check back for more blog content.

Andrew Lloyd

07/09/2020

Please see article below from AJ Bell received 06/09/2020.

Barratt makes sure its balance sheet stays as safe as houses

Barratt’s confirmation of its decision of 6 July to cancel both its planned second-half and special dividends for fiscal 2020, saving some £375 million in the process, may surprise some but the house builder’s reticence to lavish cash upon investors – at least for now – makes sense for several reasons. The early share price gains suggest that shareholders are not unduly concerned, either, especially as the FTSE 100 member is targeting a return to the dividend list when it feels it can comfortably make a payment that is 2.5 times covered by earnings per share.

The current consensus analysts’ forecasts for the year to June 2021 is a dividend of 22.1p per share, enough for a yield of more than 4%. That said, earnings estimates imply cover of 2.25 times, a little below management’s target ratio, to suggest that forecast could be a little optimistic unless profits exceed current expectations.

Still, a 4%-plus dividend yield may be enough to entice income-starved investors, even if the absence of any distributions for fiscal 2020 means patience will be required as Barratt hunkers down. The reticence to return cash now is understandable for three reasons:

Barratt did accept help from the Government’s furlough scheme and paying a dividend having accepted state assistance would not be a good look in the eyes of the wider public. To give Barratt its credit, though, the housebuilder did return the £26 million it received just as its new financial year began in July, so that could clear the way for a return to the dividend list in the fiscal year to June 2021.

The Government’s Help to Buy scheme supported 35% of last year’s completions, broadly similar to the 36% level seen the year before.

In its presentation to analysts and investors Barratt notes that just under half of these, or 16% of fiscal 2020’s total completions, would not be eligible to Help to Buy under the new, tapered terms of the programme which will apply from March 2021 to March 2023.

As a result, management may be inclined to caution, given wider uncertainty that surrounds the economic outlook. The furlough scheme is just starting to unwind and no-one quite knows what that will mean, although the Bank of England continues to expect an increase in unemployment above 7% before the worst is over, compared to June’s 3.9% rate. Any jump in joblessness could hit consumer confidence and the ability of would-be house buyers to meet mortgage payments, so they could be forgiven for deciding to stay put for a while, just in case. Whether a worst-case scenario would cap completions or hit selling prices remains to be seen, but Barratt’s target for volumes in fiscal 2020-21 of 14,500 to 15,000 lies short of prior peaks and speak of a gradual recovery, despite this week’s encouraging mortgage application statistics.

Land purchases are due to go up from £369 million in fiscal 2020 to £850 million in fiscal 2021.

Buying land cheaply is the key to long-term margins so management presumably feels now is a sensible time to buy and prioritise this in terms of current capital allocation, while preserving a net cash balance sheet (as the memories of the fright received during the downturn of 2007-09 have yet to fade), to ensure strong long-term margins and returns on capital.

These articles are for information purposes only and are not a personal recommendation or advice.

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

Charlotte Ennis

07/09/2020

Please see the below article from some of the Fund Managers at Jupiter Asset Management posted late yesterday afternoon:

The big dollar downturn?

The Federal Reserve will try to inflate debt away, and the V-shaped recovery is intact, said Mark Nash, Fund Manager, Fixed Income. The US dollar has dropped, and government bond yields have surged following the Fed’s policy shift last week at the Jackson Hole summit, where Jay Powell confirmed that the central bank was prepared to tolerate higher inflation.

What is striking, Mark said, is that global bond yields moved higher too, indicating that the dollar price action is a global reflationary booster. A weaker dollar improves the outlook for the global economy, reducing the appeal of long dated government bonds, and therefore creating steeper yield curves, he explained.

Why? In Mark’s view, it’s because the tide of liquidity has now reversed. The strong dollar was a result of the global dollar shortage, and US growth exceptionalism was linked to less cross-border lending which curtailed emerging market activity and reserve growth in those country’s central banks. This amounted to less dollar liquidity for everyone, including the Fed, and excessively tight emerging market liquidity conditions to prevent local currency weakness (notably in China, for example).  This is why, as the dollar noose tightened, emerging markets underperformed and we saw the US repo funding crisis last year, said Mark.

The Fed’s quantitative tightening program made the problem worse by removing even more dollars from the system. Mark thinks they finally became aware of the error of their ways in 2020, which explains the speedy reaction to the March funding squeeze. It’s much easier to use a crisis to reverse previous mistakes than admit to them at the time!

Mark Nash

Fund Manager, Fixed Income

After Abe, is Japan ready for a taste of Suga?

Dan Carter, Fund Manager, Global spoke about the sudden resignation of Japan’s Prime Minister Shinzo Abe, who is leaving office for health reasons. The Japanese equity market fell somewhat in reaction to the news, although the greater activity has been in the production of column inches.

Dan argued that perhaps the market impact is being somewhat overplayed, reminding us that Japanese equities have seen something of an ‘anti-bubble’ in recent years, rising strongly in nominal terms while earnings multiples have stayed fairly static (due to rising corporate profitability). That hints to Dan at where the correlation/causation sits with respect to Japanese equity market performance under Abe – and it is to a greater extent more to do with correlation.

Shinzo Abe became Japanese Prime Minister (PM) for the second time in December 2012, at the end of a cycle that had seen Japan take a beating from the global financial crisis, the Fukushima nuclear incident, and the destruction of the Tōhoku earthquake/tsunami. An economic and equity market rebound from that low would have happened almost regardless of who was PM, and has been aided by the ongoing structural tightening of the labour market which has seen better allocation of capital and a greater focus on profits. Nevertheless, it is fair to say that Abe was always a pro-business leader, for example cutting corporate tax rates, and he realised that Japan needed to use its capital base better to squeeze more growth out of its maturing economy. So, although Abe’s departure cannot be seen as positive for the Japanese market, neither should it be all that great a blow, in Dan’s view.

The most important question now is who will now take over as Prime Minister. The three names in the frame are Yoshihide Suga, Shigeru Ishiba and Fumio Kishida. Kishida would be the main continuity candidate although is seen as a dull choice, while Ishiba takes a more populist approach and would be less pro-business than Abe, although he’s more popular with voters than he is with his political colleagues so the fact that this election will be held within the party works against him.

At the time of writing, however, the front runner is Suga, the current Chief Cabinet Secretary. He is very much an Abe lieutenant and so we could expect a continuation of the general thrust of Abe’s policy agenda. One key area of difference with implications for the equity market, however, is that Suga has previously been openly critical about high prices charged by the telecommunications sector. Has the strategic savviness of telcos in the last couple of years, through introducing better structured plans and additional services, done enough to address his concerns? Or would a Suga term in office lead to a tightening of regulations and a material hit to the sector’s profitability? This is a live issue for all investors in Japanese equities, particularly those like Dan who also seek a premium yield in addition to growth, and careful thought will be needed as the story develops.

Dan Carter

Fund Manager, Japanese Equities

Investors playing catch-up on gold

Despite this year’s strong rally in the price of gold, from around US$1,500 per ounce at the beginning of the year to almost US$2,000 recently, many investors are still playing catch-up, according to Ned Naylor-Leyland, Head of Gold & Silver. Many active investors remain underweight monetary metals, according to Ned, with only reluctant participation among buyers.

Among recent converts is Warren Buffett, the sage of Omaha, previously no fan of gold, but whose Berkshire Hathaway recently disclosed a sizeable, new position – valued at more than half a billion US dollars – in one of the world’s largest gold mining companies. Behind the rally in gold is the commitment of the Federal Reserve to monetary loosening, the swelling of central bank balance sheets, and the spike in government spending, fuelling distrust of the US dollar. Negative real yields mean that many US Treasury bondholders face losses in post-inflation terms, which makes gold and silver attractive as stores of true value.

The largest gains could be seen, not in monetary metals themselves, but in the shares of companies which mine them, Ned believes. Higher market prices for gold and silver have not yet been fully factored into valuations of mining equities, he argued. Ned said that the shares in silver miners are pricing in silver below US$20, well below current market prices, which have seen silver trade at more than US$28 per ounce lately.

Ned Naylor-Leyland

Head of Strategy, Gold and Silver

From reflation to Brexit: the outlook for UK midcaps

The UK small and midcap team is focused squarely on the dynamic between coronavirus newsflow, the US election in November, the reflation trade and Brexit negotiations, said Richard Watts, Head of Strategy, UK Small & Mid Cap.

This mix of events will make for an eventful fourth quarter of the year, said Richard, adding that his core expectation is a Brexit agreement that will be viewed as not too onerous for the UK. He recognizes the inherent risks in the UK-EU talks as Britain prepares for the end of the transition period at the end of the year, and he notes that the UK market and UK midcap stocks appear cheap largely because of Brexit.

In the US, Covid-19 news has been encouraging recently, with infection numbers falling meaningfully since a spike in July, while the presidential election race may be tightening, with some oddsmakers suggesting that President Trump has pulled level with challenger Joe Biden, said Richard. Trump’s re-election may benefit more traditional, value-oriented companies, he added.

The Federal Reserve’s robust support for the US economy combined with a weaker dollar underscores a reflation trade that has implications for positioning the portfolio, Richard said. He favours a ‘barbell’ approach, with technology companies and other structural winners on one side and value-oriented stocks including banks and housebuilders on the other.

UK housebuilders have struggled to gain traction this year, in contrast to the US, where the housebuilders index has touched an all-time high. The difference in performance seems to be down to Brexit, said Richard, noting the difficulty for investors in balancing the desire for more reflationary exposure with the risks and opportunities of the Brexit dynamic. The solution may be to proceed cautiously, he said.

Richard Watts

Head of Strategy, UK Small & Mid Caps

Tech bulls still charging, but elsewhere it’s a sceptical rally

Ross Teverson, Head of Strategy, Emerging Markets, made some observations from the second quarter reporting season. Generally, these fell into two categories – those from companies that are relatively unscathed by the pandemic and those that have faced major challenges.

Internet and tech names stand out among the former category, and banks are well represented in the latter camp. The leading technology and internet commerce businesses in China, some of which already dominate some of the local indices in terms of constituent weightings, posted strong numbers with sales up by around 30% year-on-year. Semiconductor and tech hardware companies have likewise performed well as the sector benefited from a following wind. These results haven’t materially altered Ross and his team’s view of the individual companies: the strategy continues to hold their preferred names in these sectors, and so far they have resisted the temptation to take profits as they see stock-specific reasons why positive change can continue to drive earnings upgrades.

Among the more challenged part of the emerging market equity universe, Ross sees no problem in making a valuation case for investing in banks, many of which are trading at or even below book value. Banks have clearly been some of the largest hit business by the Covid-19 pandemic, but aggressive provisioning in the first quarter when the pandemic first took hold is now feeding through to an improving trend for capital ratios. Ross also highlighted a Russian bank, which delayed its dividend decision earlier in the year, but has now proposed to pay a normal level of payout (indeed it is higher than last year’s).

In summary, Ross said that for those companies that have been impacted by the pandemic, there is mounting evidence that the worst is behind them, although (with the exception of the internet/tech sector as mentioned above) there is still a lot of scepticism expressed in share prices.

Ross Teverson

Head of Strategy, Emerging Markets

This article gives a good insight into what is currently going on within a range of different areas and shows the current views of the fund managers within these sectors.

Articles like this provide us with a good update and insight into the current direction of travel within the markets.

Please continue to look out for our regular blog updates.

Andrew Lloyd

04/09/2020

Please see the below date from Legal & General’s Asset Allocation Team received late yesterday afternoon:

Waking up

Last week was a bit more eventful than the big yawn of the previous week. Rates and inflation expectations drifted up, even more so after Federal Reserve chair Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium indicated the central bank will now look to achieve an inflation rate averaging 2% over time. In addition, Shinzo Abe, the longest-serving Japanese prime minister since the Second World War, resigned and Germany, France, Italy and Spain all experienced accelerating case loads of COVID-19. James Carrick has blogged about developments in the latter country.

Investors can’t get too excited

Overall, sentiment and positioning remain quite neutral. For instance, one of our favourite indicators, the AAII Bull-Bear spread, is still negative and fund-manager cash levels are only neutral. Even sentiment in technology stocks isn’t that exuberant, as I discuss below.

We believe market sentiment is being held back by the general belief that assets have overshot fundamentals. We see some rationale for that in equities, credit and gold. Growth expectations are at their highest since December 2009, albeit from a very low base, and the economic surprise index – which is mean reverting by nature – is close to an all-time high. As investors adjust their expectations up, the market is now more prone to disappointments.

We therefore remain neutral on risk, but are starting to short areas where risks look asymmetric – US investment-grade credit, for example, and EU/GBP inflation. Our rates team likes to be long some markets with higher yields such as Australia, South Korea, and the long end of the US.

What the tech is going on?

It has been another good run for tech. The sector is back at its relative highs from July and, whisper it quietly, even the dotcom bubble’s relative highs from 2000 don’t look that far away anymore. The price charts for some tech names are starting to look exponential.

So is it time to sell the rally or hold on for the ride? We have long had two guiding principles for tactically reducing our tech position: excessive valuations and/or excessive bullishness. Neither signal has turned red yet.

On the first, outperformance has been driven by superior earnings rather than by valuations. In fact, the relative price-to-earnings ratio remains roughly where it was in January. Staying long tech requires a belief in a step change in relative earnings, but in principle this does not feel like a big stretch.

On sentiment, it is impossible to argue that tech is a particularly unpopular sector. But we don’t see signs of excessive bullishness either. The most recent institutional investor surveys actually showed a small decline in positioning. On the increasingly important retail front, Robinhood data show that while there have been flows into tech recently, private investors remain underweight the sector. So, for the time being, we choose to hold on for the ride.

COVID-19 and belief-scarring

An interesting paper has been published that tries to quantify how people’s long-term belief systems have changed because of the pandemic (Kozlowski, Veldkamp & Venkateswaran 2020).

The largest economic cost of COVID-19 could arise from changes in behaviour long after the immediate health crisis is resolved. A persistent change in the perceived probability of an extreme, negative shock in the future affects behaviour. You see a similar phenomenon when people go through deep personal crises due to war or natural disasters.

The authors find that the long-run costs for the US economy from this channel are many times higher than the estimates of the short-run losses in output. This suggests that, even if a vaccine causes the virus to disappear in a year, the COVID-19 crisis will leave its mark on the US economy for many years to come.

The authors conclude that considering the long-run consequences significantly changes the cost-benefit analysis for financial support policies (i.e. providing more fiscal support now to prevent scarring could help GDP growth in the years to come).

This email represents solely the investment views of LGIM’s Asset Allocation team.

As we noted in last week’s Legal & General update, it’s good to have an insight into how some of the big investment companies Asset Allocation teams think, this is just one of the ways that we at People and Business get a view on current market trends and how these are being factored into investments funds and portfolios.

Keep checking back for more updates as we continue to provide commentary from a range of industry experts to keep you updated as we continue to navigate our way through these strange and unprecedented times.

Andrew Lloyd

02/09/2020

Please see the below article posted by AJ Bell late last week:

Milwaukee, Wisconsin, and Jacksonville, Florida, are home to two of America’s National Football League’s 32 teams: the Green Bay Packers and the Jacksonville Jaguars. Owing to the pandemic, it is not clear at the moment whether gridiron fans will be allowed into their stadia at any stage this season to watch the games, which are due to begin in September.

But two other important events in these cities have already fallen foul of COVID-19. Last week’s Democratic Party convention, slated for Milwaukee, became a virtual affair as the majority of speakers stayed away, even while Joe Biden and Kamala Harris punched their ticket as the party’s chosen pairing for next US Presidential Election – which is due on Tuesday 3 November. Meanwhile, the Republican incumbent in the White House, Donald Trump, had already cancelled his planned convention in Jacksonville, although a pared-down affair took place in Charlotte, North Carolina, earlier this week, as he and Vice President Mike Pence prepared to run for a second term in office.

The race is now on between the Trump/Pence and Biden/Harris teams to give advisers and clients something else to mull over as they continue to wrestle with how the pandemic will continue to affect the world’s largest economy. The political temperature will only rise from here, with three presidential television debates scheduled for 29 September, 15 October and 22 October and one vice-presidential contest on 7 October before Americans head to the ballot box.

Voting patterns

In admittedly very crude terms, you might expect the US stock market to prefer a Republican President to a Democrat one, with the Grand Old Party generally seen as being in favour of small(er) Government and less inclined to interfere in business matters and free markets than the Democrats.

“Over 18 presidencies since the election of Harry S. Truman in 1948, the Dow Jones Industrials has, on average, done better under Democratic presidents than it has under Republican ones.”

However, it generally has not worked out like that, at least not in modern times. Over 18 presidencies since the election of Harry S. Truman in 1948, the Dow Jones Industrials has, on average, done better under Democratic presidents than it has under Republican ones. Even more intriguingly with 2021 in mind, the Dow has done much better in the first year of a Democratic term than it has a Republican one, with an average gain of 13.1% compared to 2% from their rival incumbents.

The Dow Jones has tended to perform better under Democratic presidents than Republican ones, especially during the first year of a term.

Source: Refinitiv data. * John F. Kennedy assassinated in November 1963 and replaced by Lyndon B. Johnson. ** Richard M. Nixon resigned August 1974 and replaced by Gerald R. Ford. *** Data for Donald J. Trump as of 17 August 2020

A long time ago

It therefore is not as simple as ‘Republicans good, Democrats bad’ when American politics is assessed through the very narrow prism of the US stock market. This is particularly the case now, when the Republicans were running up the sort of budget deficits that would make even the most ardently pro-spending Democrat blush, even before the pandemic forced an emergency fiscal response.

Moreover, if advisers and clients cast their minds back four years ago, the Democrats’ Hillary Clinton was then seen as a bit of a shoo-in for the 2016 election, as the Republican’s Trump had surprised everyone by winning the Grand Old Party’s nomination. Trump was also widely perceived as a potentially negative result for markets, thanks to his sabre-rattling on issues such as diplomatic relations with China, Iran and Mexico and desire to rip up several trade agreements, including the North America Free Trade Agreement (NAFTA).

But that isn’t how it turned out.

“It may still trade below its all-time high, but the Dow Jones Industrials index is up by some 40% since Trump’s inauguration on 20 January 2017.”

It may still trade below its all-time high, but the Dow Jones Industrials index is up by some 40% since Trump’s inauguration on 20 January 2017, thanks to what had been a steady economic expansion, tax cuts and an accommodative US Federal Reserve, which had pretty quickly backed away from raising interest rates and sterilising Quantitative Easing, even before COVID-19 swept around the globe.

Dow Jones Industrials has powered higher during Trump presidency

Source: Refinitiv data. Covers period since inauguration ceremony on 20 January 2017.

This suggests that there is more than just politics at play when it comes to how a stock market performs, with monetary policy, economic performance and the possibility of exogenous shocks (such as a pandemic) all factors to be considered, among others, even before we get to the vexed issue of valuation.

“How much of a bearing November’s winner has upon financial markets’ performance will to a degree depend upon which party wins the House of Representatives and the Senate, so advisers and clients will need to consider this too.”

That said, Trump has undeniably been influential, from his market-pumping tweets to his economy-pumping tax cuts. How much bearing November’s winner has upon financial markets’ performance will to a degree depend upon which party wins the House of Representatives and the Senate, so advisers and clients will need to consider this too. Trump has achieved less in the second half of his term as the Democrats have controlled both houses on Capitol Hill.

The tricky things is sorting out the policies that are just electioneering and slogans from the plans that may actually be enacted. As the economist Robert Sowell once noted: “Economists are often asked to predict what the economy is going to do – but economic predictions require predicting what politicians are going to do and nothing is more unpredictable.”

The run up to a Presidential election is always interesting, this year even more so with the Covid-19 Pandemic and the complications this has brought and continues to bring.

The next few months will be an interesting ride!

Please continue to check back for further updates on the US Presidential Election and the affect this has on the markets as well as our usual variety of market updates and blog content.

Andrew Lloyd

01/09/2020