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Invesco Insights: Israel’s economic data starts to show the impact of vaccines

Please see below for one of the latest Invesco Insight articles written by Kristina Hooper, Chief Global Market Strategist at Invesco Ltd. This article was received by us today 07/04/2021:

A month ago, I wrote about the great progress Israel was making in terms of inoculating its citizens against COVID-19. At the time, I said that we would want to follow economic data in Israel closely for indications of what the US and UK could expect in the near future — as they are making swift progress in vaccinating their respective populations — as well as what any country can expect once it successfully vaccinates a significant portion of its population. Therefore, I think it’s worth re-visiting Israel to see the impact that widespread immunization has had on its economy. It’s clear that Israel’s vaccination program is not only having a substantial impact on consumer confidence, but also on spending.

Israel’s data shows the impact of vaccines

While vaccinations only began in December, they ramped up quickly. As of April 4, Israel has given at least one dose of a COVID-19 vaccine to 59% of its population, with 54% fully vaccinated.1 The economic impact was seen relatively early on. As morbidity moderated, restrictions eased and the third lockdown was rolled back — and the Bank of Israel’s Composite State of the Economy Index for February increased by 0.4%.2

Mobility, which we have found to be a helpful indicator of economic activity, has increased substantially. By the end of March 2021, retail and recreation mobility (restaurants, cafes, shopping centers, movie theaters, etc.) was off by only 6% from January 2020 levels, while grocery and pharmacy mobility is actually higher than those early 2020 levels.3 And, not surprisingly, economic activity accelerated in March. Daily credit card data shows that the value of transactions for the week ending March 22 was actually 15% higher than it was in January 2020.4 By comparison, back in April 2020, the value of transactions was more than 40% below its level in January of 2020.4 The rebound in spending has been strongest in some of the areas hardest hit by the pandemic, especially leisure and tourism.

Why is this time different?

What makes this time different than past economic re-openings, like we saw in spring 2020? Before broad vaccinations, the re-opening of an economy was a double-edged sword. Typically, a re-opening would often be followed, after a lag, with an increase in COVID-19 infections. In addition, the increase in economic activity would typically be tempered because some consumers would be reluctant to go out and spend despite the re-opening because of health safety concerns.

I believe this time is different because vaccinated consumers will be more likely to re-engage in pre-pandemic economic activity and, according to medical research, should be well protected against COVID-19 — so spending should not be tempered as in past re-openings. Israel’s re-opening is already proving that vaccinations are leading to an uptick in consumer activity, and they haven’t seen another wave of COVID-19 infections.

A preview of what’s to come in the US and UK?

In my view, Israel’s current state illustrates what we can soon expect in countries such as the United States and then the United Kingdom — and in any country once it has achieved broad vaccination of its population. In the United States, 31% of the population has received at least one dose of a vaccine, and 18% have been fully vaccinated.1 In the United Kingdom, 47% of the population has received at least one dose of a COVID-19 vaccine, although only 7.8% of the population is fully vaccinated.1

The US economy is already seeing significant improvement, further helped by fiscal stimulus. For example, the March employment situation report saw a far-better-than-expected increase in non-farm payrolls at 916,000.5 And we just got the ISM Services PMI for March, which was also far better than expected, clocking in at 63.7 with all 18 services industries reported growth.6 The only problem is that COVID-19 infections are on the rise in some states in the US, so vaccinations will need to maintain momentum in order to slow and ultimately stop the rise in infections.

The UK is a bit more complicated and hasn’t shown as much improvement yet because it remains at a relatively strict level of pandemic-related lockdown, although stringency is being eased gradually.

Investment implications

I expect that rising vaccinations and improving economic data are likely to lead to a continued rise in bond yields and outperformance of smaller-cap and cyclical stocks, especially in countries that are leading the recovery.

I should add that in the US, there are a few clouds on the horizon in the form of growing fears of rising taxes. And that is likely to be the case for a number of countries burdened with higher debt levels created by the pandemic. While far from a reality at the moment, if an increase in taxes becomes more likely — especially a large increase in corporate taxes – we could see some shift in leadership, albeit modest, to larger-cap and more defensive names. However, it’s important to stress I don’t believe this would end the stock market recovery, but could just cause some rotation in leadership.

But right now, the focus is on the virus and vaccinations. As the Brookings-FT Tracking Index for the Global Economic Recovery has indicated, the ability to control COVID-19 is likely to be the main determinant of economic success in 2021.7 That is why the index shows major economies such as China and the US leading the global recovery. The index suggests that there may not be a coordinated global economic rebound, but that instead there may be a time lag for some countries, especially Europe and Latin America, given their lack of progress in vaccine rollout and general difficulties in controlling the virus. This isn’t surprising — and it’s something we anticipated last year when putting together our 2021 outlook. In other words, we believe an economic recovery is in the future for all parts of the world, but its timing and strength will be dictated by control of the virus and vaccine rollout progress, and so we will want to follow this data closely.

Key takeaways

Recent data has been positive

Mobility, which we have found to be a helpful indicator of economic activity, has increased substantially in Israel.

A preview of what’s to come?

In my view, Israel’s current state illustrates what we can expect in countries that achieve broad vaccination of their populations.

What might this mean for stocks?

I expect this economic recovery to be very robust, which may lead to outperformance by smaller-cap stocks and cyclical stocks.

Please continue to utilise these blogs and expert insights to keep your own holistic view markets up to date.

Keep safe and well.

Paul Green DipFA

07/04/2021

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Brooks MacDonald Weekly Market Commentary 01/03/2021

Please see below for Brooks MacDonald’s latest weekly market commentary received by us late afternoon 01/03/2021:

In Summary:

  • Yield rises remain the major driver of equity markets
  • Johnson & Johnson’s single shot vaccine is approved in the US, adding to the breadth of vaccine supply
  • Israel eases some restrictions as the UK is set to lay out its reopening plans

Yield rises remain the major driver of equity markets

Last week saw a large uptick in volatility as higher yields caused a sell-off in markets that focused on secular growth sectors such as technology. Meanwhile, previously unloved sectors such as banks performed strongly on the back of steepening yield curves and lower expected defaults in the future as the economy recovers.

Johnson & Johnson’s single shot vaccine is approved in the US, adding to the breadth of vaccine supply

The theme of the last few days has been a tightening of restrictions, rather than loosening, as several European countries needed to roll back liberties and Auckland, New Zealand entered a fresh lockdown. More positively, the Johnson & Johnson (J&J) vaccine has been approved in the US with the company saying they can ship 100 million doses in H1 2021. While the efficacy data was less compelling for the J&J vaccine, it is recommended as a single dose vaccine which makes the rollout of logistics simpler.

The change in yields has had an outsized impact on technology companies

The ‘price’ of a financial asset is the sum of its future cashflows adjusted for a discount rate. In practice this means the sum of a company’s future earnings which are adjusted for interest rates plus an extra company specific risk premium on top. Value companies tend to produce higher earnings now but less exciting earnings in the future. Growth companies, by contrast, produce little now but are expected to make outsized earnings in the future. Because the earnings in growth companies tend to be further away, the discount rate is more important. Due to the power of compounding, a small change in interest rates can significantly reduce the present value of future earnings 10 or 20 years away. This is exactly what happened last week when a pickup in interest rate expectations caused high growth companies to look less attractive. The moves were relatively small, with the US 10 year rising around 7bps to just over 1.4% but with valuations richer in the technology space, this was enough to catalyse a sell-off.

Of course, the question is whether central banks will let further yield rises happen. So far, the Federal Reserve have pushed back against expectations for sustained inflation but have broadly welcomed the pickup in yields, saying it is reflective of an improved economic backdrop. The next Federal Reserve (Fed) meeting is on 16-17 March, however this week we hear from a series of members including Fed Chair Jerome Powell. Should rapid rises in yields continue to be a theme, we expect the Federal Reserve to step in, at least verbally, to steady further rises. Yield rises can impact both financial stability and damage the economic recovery so central banks will be paying close attention.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

01/03/2021

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Legal & General: Our Asset Allocation team’s key beliefs

Please see below for Legal & General’s latest Asset Allocation Team Key Beliefs Article, received by us yesterday afternoon 22/02/2021:

The consumer economy

Tim Drayson, our head of economics, often warns us not to bet against the US consumer. Last week, the US retail sales numbers for January smashed forecasts and once again showed that stimulus works, especially direct cash payments to households. Around 25% of the $600 received by individuals earning $75,000 or less was immediately spent, generating a $30 billion bounce in retail sales across all categories. Perhaps as a sign that economic optimism is already well priced in, equity markets chopped around last week although Treasury yields have been drifting higher.

The price of everything…

Clients are asking whether stock markets are getting ahead of themselves. We push back on this. If equity prices move up in lockstep with your view of the future improving, you should become neither more nor less optimistic. Given we believe we are early in the cycle, the mantra should remain unchanged: stay long, buy the dips.

Price is no determinant of value or valuations; it is only useful in relation to what you get for what you’ve paid. Is $100,000 a lot for a car? It depends if it’s for a Golf or a Ferrari. This is one reason we use multiples to think about valuations. Multiples that have historically exhibited mean-reverting properties over the long run have had some predictive power for longer-term returns. Prices, though, are not mean reverting and tell you nothing about future returns.

We pay particular attention to relative valuation. The yield gap is one representative measure; it hasn’t moved much recently but is still high by historical standards. Moreover, early in the cycle it’s quite normal for valuations to shoot up. This rebound has, so far, looked quite similar to the one in 2009 in magnitude.

Our baseline is that this bull market will last until the next recession. There’s a lot of runway left before then, in our view, and we expect the S&P 500 to be materially higher before the bull market ends.

Real talk

Investors are becoming more worried about the rise in bond yields and the possible impact on equity markets. The recent choppiness in equities while yields have drifted up adds to their nervousness. Although we believe nominal and real yields will rise further (and by more than currently priced in the forwards), we think this should be well digested by equity markets. We note that the 2013 taper tantrum saw a 75 basis point spike in bond yields but ‘only’ a 6% correction in the S&P. (Tim recently discussed the possibility of new US tapering.)

Empirically, there’s not much evidence that rising real yields are particularly bad news for equities, especially from these very low levels. In fact, rising real yields have mostly been associated with higher equities. Historically, the correlation between real yields and equity markets has turned negative at much higher real yields.

It’s crucial to understand what is driving yield moves. As long as rising yields reflect a combination of higher inflation and better growth prospects, this should be positive for markets. Only when policymakers become worried should we be ready for change. Equity markets may panic when they see either a de-anchoring of inflation expectations or they need to bring forward the timing of policy normalisation. In our view, it is far too early for either of these, but clearly both need to be monitored very closely.

All about that base effect

The next round of stimulus is still being debated by Congress. Last week, Treasury Secretary Yellen commented that “the risk of doing too little is greater than of doing too much”. If such an approach is adopted, the direct uplift to household incomes will potentially be at least three times larger than included in the COVID relief bill at the end of 2020. This money should hit people’s accounts just as the US begins to re-open more fully. Alongside the excess household savings accumulated during the pandemic, this could fuel a surge in demand.

This makes us think about the implications of the money supply glut. None of us have seen money supply grow on the current scale, the only precedent being during the Second World War. Half of the increase in broad money supply sits directly in household accounts, and cash as a share of financial assets for non-financial corporates is at its highest levels since 1969. We believe that a significant amount of this cash will be spent, boosting growth, corporate profitability, and possibly inflation.

On inflation, we know there will be a pronounced base effect around the spring as prices fell sharply while the economy was locked down last year. This, plus later boosts from CPI components that were depressed by restrictions like airfares and hotel prices, could temporarily raise inflation above target-consistent levels.

The Federal Reserve has highlighted this potential outcome, with January’s minutes containing a discussion on why it would be prudent to look through this increase. This makes sense in our view as it is equally likely that inflation will fall back in the summer. Base effects reverse, and there are also some aspects of inflation that have been lifted by the pandemic but are likely to weaken once the economy reopens. Used-car prices are an example.

Further out, the inflation picture becomes much murkier. How much slack will be left in the economy? Does the jump in money supply matter? Are some of the structural disinflationary forces of the past decade, like technology, beginning to shift? How well anchored are inflation expectations?

We believe that inflation becoming high enough to constrain monetary policy is still a way off. But if we get there, central banks in developed markets might be surprised by how much they have to raise rates to reduce inflationary pressure. Money doesn’t play a role in their models, despite monetary aggregates generally being excellent predictors of economic aggregates, and they aren’t able to directly undo the monetary and fiscal one-two that’s been so effective at putting cash in consumers’ pockets.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

23/02/2021

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Brooks MacDonald Daily Investment Bulletin: 11/02/2021

Please see below for the latest Brooks MacDonald Daily Investment Bulletin received by us today 11/02/2021:

What has happened

Markets were largely rangebound for the second day in a row as investors await any change to the vaccine narrative and the size and pace of US Fiscal Stimulus.

Fed Chair Powell

Yesterday Fed Chair Powell spoke to the Economic Club of New York. The two overall themes were an ongoing need for fiscal support and pushing back against concerns over inflationary pressures. Powell highlighted that the US market had struggled to generate inflation even when the jobless rate was at the multi-decade lows of 3.5% and that significant slack existed now. The Federal Reserve’s estimates of the true level of unemployment are c. 10% after the ‘hidden slack’ has been adjusted for. Powell weighed in on the stimulus debate stressing the headwinds to inflationary pressures and pushing back on the notion that larger stimulus would cause the US economy to overheat. These comments come as the various votes on the elements of the stimulus bill are moving through the House of Representatives with a vote expected on the full bill in a fortnight. On monetary policy, he stressed the need for ‘supportive monetary policy’ for the US to reach full employment again, calming fears that the Federal Reserve would look to reduce stimulus in the foreseeable future.

Vaccine update

The World Health Organisation recommended that the Oxford/AstraZeneca vaccine should be used on all adults even in countries where new variants are present. The WHO also endorsed the method, trialled by the UK government, to delay the second dose in order to provide a higher percentage of protection in the community at a faster rate. There has been some debate, particularly in European countries, over the efficacy of the Oxford/AstraZeneca vaccine in various demographic groups and the WHO’s support should help shift that debate. As we have mentioned previously, the Oxford/AstraZeneca vaccine is expected to be a workhorse for population wide protection due to its low cost and easier logistics, the WHO’s comments reduce the risk of countries needing to seek new supply sources.

What does Brooks Macdonald think

Fed Chair Powell’s comments yesterday very much played to the market’s narrative that the output gap (the gap between current output and potential output) will keep inflation under control for the time being. The debate on the overall size of the US Fiscal Stimulus package is being determined by a series of smaller votes on components of the broader bill. Powell’s comments yesterday may help calm concerns over the overall size of the bill as it progresses through Congress.

Markets globally will be responding to ongoing vaccination rollouts and keeping up to date with developments as they happen can, as ever, help inform your own views of the markets.  

Please utilise our blogs in keeping your own views of the market up to date.

Keep safe and well.

Paul Green 11/02/2021

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Brooks MacDonald Weekly Market Commentary | Vaccine distribution continues to be key focus for investors

Please see below for the latest Brooks MacDonald Weekly Investment Bulletin received by us yesterday 01/02/2021:

Vaccine nationalism raises its head as competing contracts and supply issues collide

A bout of risk off sentiment hit equities, bringing most European and US indices slightly negative for the first month of 2021. The risk of a vaccine trade war, less positive data from Johnson & Johnson’s vaccine and the risk of further COVID-19 restrictions all dampened the mood. Friday saw a bubbling over of increasingly hostile words between the EU and AstraZeneca. In short, the EU imposed the right to ban vaccine exports outside of the EU (and select countries) and effectively imposed a hard border between Northern Ireland and the Republic of Ireland. This proved only temporary, with the hard border reversed and the prospect of export bans to the UK played down as Friday and the weekend progressed. So called ‘vaccine nationalism’ has been a threat for several months as issues over regional supply chains combine with the sequencing of competing contracts and an increasingly frustrated populace. On Sunday, the UK announced that it had provided almost 600,000 vaccinations in one day (over 1% of adults), which may suggest that as supply increases, countries will be able to work quickly to inoculate their populations.

Markets look ahead to Friday’s US employment data after last month’s disappointment

This Friday sees the important non-farm payroll US employment figures released. Last month saw a decline of 140,000 jobs1 , the first decline since the first wave of the pandemic. This month economists are expecting a 50,000 increase and therefore for the headline 6.7% unemployment rate to remain stable2 . US economic data has shown resilience in the face of the current COVID-19 wave but there is still a large amount of spare capacity in the labour market, something that may curb any bubbling inflationary pressures. With employment a major item on President Biden’s agenda, it seems likely that the US Stimulus Package will move through Congress under the Budget Reconciliation rules. The downside of using this process is that there is a limit on the scope of the legislation and a limit on the number of times the process can be used.

US stimulus may progress using the budget reconciliation process but this has limits

The prospect of using the budget reconciliation process has dampened expectations of a bipartisan agreement that could leave the door open for further stimulus over the coming months. The reconciliation process means that the bill can pass with a simple majority in the Senate rather than being held up by the filibuster. The reconciliation process has historically only been used once per calendar year due to its inbuilt limitations, so there will be additional scrutiny on the proposed package if it is expected to be the only US stimulus in 2021.

Weekly investment bulletins like these are a good way to get regular input from market experts. 

The mass rollout of the vaccine is set to cause gradual change to the market outlook, hopefully life and economies will improve.

Please keep up to date with our blogs.

Keep safe and well.

Paul Green 02/02/2021

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Legal & General: Our Asset Allocation team’s key beliefs

Please see below for Legal and General’s latest Asset Allocation Team’s Key Beliefs article received by us the afternoon of 25/01/2021:

Bubble trouble?

Never have more people searched for the term ‘stock market bubble’ on Google. Data stretching back to 2004 show that January 2021 is set to eclipse January 2018, when searches for the term both preceded and followed a 10% drop in the S&P 500 over nine trading days. As we have highlighted before, investor optimism is pretty well inflated and, while most sentiment indicators don’t look stretched, many are elevated.

Burst case scenario

Not everyone is optimistic, though. One scholar of market bubbles, Jeremy Grantham, opened his new outlook: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.” Grantham has a good track record in predicting the moments when bubbles burst, so should we be worried? We think the famed investor may be right but, as he concedes, we believe the market could still run a lot further. Our own bubble index shows that the probability of a market bubble has indeed been rising. In fact, it is now the highest it has been since 2008.

What has driven this? We have seen an increase in capital raising through IPOs and SPACs, some of which echo the tech bubble of the late 1990s. US retail investor activity has also taken off, with easier access through investment platforms and, for some, new money to play with from stimulus cheques. However, we are just emerging from the COVID-driven economic recession. This means many macroeconomic indicators have improved, policy is supportive, and there is plenty more cash on the side lines ready to be deployed, regardless of further fiscal stimulus.

So while the market is definitely reminiscent of a bubble forming, it could easily still get much stronger from here. We therefore believe it’s too early to call a bubble now.

The moderates yield

If you weren’t able to watch any of the US presidential inauguration, I recommend viewing US National Youth Poet Laureate Amanda Gorman’s recital of “The Hill We Climb”, a powerful and gritty poem of hope for the future of the US, from a self-proclaimed presidential candidate for 2036.

In the more immediate future, the most relevant aspect of the new Biden administration to financial markets will be the prospect of more fiscal stimulus. The central case is for another virus relief package worth $1 trillion to be passed in the coming months, with an additional $1 trillion recovery package potentially following later. The quicker the economy recovers, of course, the smaller later packages will be.

Politically, though, we see the path of least resistance actually being for more fiscal spending rather than less. With a razor-thin majority, power accrues to the moderates, which means only consensus policies can pass. We expect it will be easier to build such a consensus on extra spending (giving things away) than on extra revenues (taking things away). While Democratic moderates have supported virus relief and the current package so far, several are not on record as supporting Biden’s tax proposals. Finally, voters don’t appear to care as much about deficits anymore, so senators probably won’t either.

Treasury yields could be the place where changing fiscal dynamics are priced, and indeed US yields have risen more than others in recent weeks after the Georgia runoffs, but as it stands we are comfortable with an overall neutral position on duration. In fact, we prefer US markets to UK gilts, which have only seen more modest yield rises despite the so-far successful vaccine rollout and expectations for a fiscally conservative budget.

Flexible recipe for fixed income

Multi-asset portfolios are like giant cakes, baked with multiple ingredients. We have decided to add a new ingredient to our cake: Chinese bonds. Technically it’s not new, as they are a growing part of emerging-market bond allocations in portfolios, but we have moved to an explicitly positive view.

We believe Chinese bonds add a lot of diversification to our fixed income holdings as China hums to a slightly different economic tune from the rest of the world, with a different monetary policy framework too. Historically, Chinese bonds have had a low correlation to other bonds. Their yields are relatively high, and we are particularly interested in bonds that could continue to provide protection in macro downturns as we believe many traditional bond markets will struggle to provide the defence they offered in the past.

This is just one of the steps we have been taking in portfolios to try to manage investor outcomes in a low interest-rate environment, with greater roles for non-traditional fixed income assets as well as defensive currencies and other strategies.

Regularly ‘picking the brains’ of investment managers and experts by reading articles like these can help update your own view of the markets and current global affairs.

Please keep reading these blogs to keep your view of the market well informed and up to date.

Stay safe and well

Paul Green 26/01/2021

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Brooks MacDonald Daily Investment Bulletin: 21/01/2021

Please see below for the latest Brooks MacDonald Daily Investment Bulletin received by us today 21/01/2021:

What has happened

Markets greeted the inauguration of Joe Biden with a rally driven by the tech heavyweights. Some markets concerns remained around the final handover of Presidential power from Trump to Biden so there will be an element of welcoming the calmer tone of the new President as well as removing a transition risk premium.

President Biden

Yesterday’s inaugural Presidential address saw President Biden attempt to change the tone in Washington by encouraging bipartisan debate rather than absolutism. This speech was followed by a series of executive orders as expected. This included the US re-joining the Paris climate agreement, ceasing the withdrawal from the WHO, ending the travel ban on a number of Muslin countries and a federal mask rule on interstate travel and within federal buildings. As a sign of the focus for the new administration’s economic goals, there were also some specific COVID support measures such as pausing federal student loan repayments and extending the federal eviction moratorium. Yesterday’s speech, coupled with that of Janet Yellen earlier this week, paints a market friendly picture where near term support remains the focus. Of course, the sting in the tail could be higher taxes down the line but we need to remind ourselves of the thin Senate majority and the fact the midterms are in November next year and this could change the power balance in Congress yet again.

Central bank decisions

Yesterday we heard from the Bank of Japan which left monetary policy unchanged whilst predicting economic challenges over the course of 2021. Today is the turn of the ECB and given the central bank announced a further easing package in December, little dramatic change is expected. The central bank meets under the cloud of Euro Area CPI estimates that showed the region in deflation (-0.3%) compared to the year before. Whilst forward looking CPI estimates have been rising, in line with the broad global market reflation narrative, even these future estimates remain well below the ECB’s 2% target. The central bank therefore likely has room to increase stimulus but it isn’t clear that simply doing more of what has been tried before (bank lending, negative rates and quantitative easing) will have the desired effect.

What does Brooks Macdonald think

Equities rose and volatility fell as power transitioned peacefully between President Trump and President Biden. It is interesting that yesterday’s rally was so tech focused given fears over regulation under a Democrat White House and Congress. The rally yesterday implies that investors are confident the new administration has its hands full with the COVID response and is unlikely to look towards market unfriendly reform within that context.

Daily investment bulletins like this could prove to be very useful in the near future. Yesterday’s Presidential Inauguration is sure to cause ripples in the markets globally and keeping up to date with developments as they happen can, as ever, be very beneficial to your own views of the markets.

Please utilise our blogs in keeping your own views of the market holistic and up to date.

Keep safe and well.

Paul Green 21/01/2021

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Market predictions and investment resolutions for 2021

Please see below for Invesco’s article on Market Predictions for the year ahead, received by us yesterday 06/01/2020:

Happy New Year! No one wants a year in review for 2020, but here is what I learned from the past year: History may not repeat itself, but it sure does rhyme. What we learned from 2020 is a repeat of the lesson we learned from the global financial crisis (GFC): Central banks are very powerful. They can’t cure viruses and they can’t create jobs, but they can boost confidence and move markets — a lot. That is the big similarity 2020 had with 2009: Central bank intervention mattered, especially by benefiting risk assets.

When I think of the New Year, I think of predictions and resolutions. And so today, I provide you with a little of both.

My New Year’s predictions

1. US-China relations may get warmer. There seem to be two factions emerging among Biden loyalists: “reformists” who want to push China aggressively on key issues and check its power, and “restorationists” who want to restore US-China relations to where they were in the Obama administration. I believe Biden will do what he typically does: land somewhere in the middle. I don’t expect US-China relations to return to what they were pre-Trump. However, I do expect the relationship between the two countries to improve and normalize. In particular, I expect more predictability and less volatility. While Biden may not unwind tariffs immediately, I do expect him to unwind the Trump administration tariffs after a “study” of their impact (which has obviously been negative for parts of the US economy, especially agriculture). The Biden administration will likely be aggressive on specific issues with China and pursue those issues multilaterally — but I expect that to occur within the context of a broader US-Sino relationship that is more cordial because the fortunes of many US businesses are tied to China. The Chinese economy is on pace to soon overtake that of the US, with the timeline expedited due to COVID, which gives China growing leverage. In fact, the Centre for Economics and Business Research recently released its forecast that China will overtake the United States by 2028 as the world’s largest economy, which is five years earlier than previously estimated due to the two countries’ very different recoveries from the pandemic.1 In addition, China has already begun to signal that it would like improved relations with the US. China’s Foreign Minister Wang Yi said in a recent interview with the South China Morning Post that both the US and China have been negatively impacted by the deterioration in their relationship over the past several years, and that US-China relations have come to a “new crossroads” with a “new window of hope” opening.2

2. Developed countries may have a better recovery than they did post-GFC. As COVID-19 vaccines are broadly distributed, I expect the economic recovery to be far more robust and inclusive than the economic recovery coming out of the global financial crisis. I believe the services industry will rebound with greater intensity, benefiting many lower income workers. That doesn’t mean that there won’t be more glitches in distribution — I fully expect there to be. And there will likely be more pandemic-related headwinds, such as the development of worse strains of the virus. However, once a substantial portion of the population is inoculated, I expect the economic recovery to be powerful. 

3. Oil may rise. Given my expectation for a strong economic recovery in 2021 as vaccines are distributed, I also expect demand for oil to increase significantly. I believe this will lead to a substantial increase in the price of West Texas Intermediate crude oil — even if we see a ramp up in oil production.

4. Bitcoin may fall. I know there is a lot of excitement over Bitcoin, but it’s starting to feel a bit like Tulipmania. Bitcoin rose more than 300% in 2020, with much of the gains made in the last few months of the year.3 I continue to believe gold is a far better choice for diversification into “hard assets” and as a hedge against geopolitical risk. Bitcoin might continue to run for a while this year, but I expect it to be volatile and to ultimately disappoint, as it has in the past after strong rallies.

5. The S&P 500 Index may have another double-digit return in 2021. With vaccine distribution beginning, a robust economic recovery anticipated in the not-too-distant future, as well as extraordinary accommodation from the Federal Reserve, I expect a continuation of the stock rally we saw in 2020, albeit with drops and pauses along the way. Better-than-expected corporate earnings should also help.

My New Year’s resolutions

1. Stay invested and well diversified. While I feel very confident about risk assets in 2021, that doesn’t mean there won’t be volatility and sell-offs in the coming year. I believe having adequate exposure to stocks, fixed income, and alternative asset classes is key to building a portfolio that may withstand volatility.

2. Look to Asia’s emerging markets. My outlook is especially bright for the emerging markets countries that have managed the pandemic well, such as China and Korea. These economies have a head start on the robust vaccine-fueled economic recovery that I expect in 2021.

3. Don’t overlook tech. While the economic rebound may result in strong performance by cyclical stocks in sectors such as energy and consumer discretionary, I don’t necessarily expect tech stocks to underperform. I continue to favor adequate exposure to the technology sector, as I believe many tech stocks may continue to benefit from trends that accelerated during the pandemic.

Although nothing is guaranteed for the future as proven by the year 2020, expert insight and opinion like this is a good way of seeing how actions and news developing worldwide could have an impact on the investment markets, and thus highlights good topics for discussion.

Please utilise blogs like these to aid your own informed opinions on what may lie ahead for the markets, but I reiterate that nothing is guaranteed for the future.   

Keep safe and well and all the best for 2021.

Kind Regards

Paul Green

07/01/2021

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Brooks McDonald Daily Investment Bulletin

Please see below for the Daily Investment Bulletin from Brooks McDonald, received by us today 05/01/2021:

What has happened

Markets started the day positively but the New Year jubilance faded as the US COVID outlook worsened and a tight Georgia run-off today could go either way. The US index started the day in positive territory before falling as much as 2.5% then settling 1.5% down at the close.

COVID’s new variant and restrictions

The new COVID variant has been responsible for a large quantum of the surge in the South East of England and news that it had now been detected in New York, Colorado, California and Florida did little to help the mood. Whilst there is no evidence that the new strain is more deadly it does appear to be transmitting aggressively, causing strain on the healthcare system. It is this strain that led to UK PM Johnson announcing that England would move into its third Lockdown with the new stay at home rules far more reminiscent of March 2020’s with schools closed and only essential journeys allowed. UK Chancellor Sunak is expected to unveil a fresh support package for UK companies in light of these new tough restrictions which are expected to produce a similar economic impact to that seen in March and April last year.

Georgia run-off

The other event keeping New Year optimism in check is the Georgia Senate run-off. This is clearly key in determining which party has control of the Senate and therefore whether a blue sweep can be achieved. Back in November the market’s base case was that the Democrats would win every race and this would give them the flexibility to launch substantial stimulus in Q1 2021. Once this didn’t immediately materialise, investors warmed to the idea of a split Congress as this would curb the chances of tax rises, tougher regulation and other less economically positive reforms. As we approach today’s election, the Democrats are ahead in both seats, albeit it narrowly, and investors are not entirely sure which side of the coin they want the race to land.

What does Brooks Macdonald think

A Democrat clean sweep or a split Congress both have benefits and negatives but our instinct is that a split Congress would be more market friendly as it retains the status quo and financial assets will look through the positives of US Fiscal Stimulus quite quickly as compared to broader reforms. Even if the Democrats do take both seats, and VP-Elect Harris is left with the deciding vote in the Senate, the current filibuster rules will stop contentious legislation. If we do see a blue sweep, markets will look very closely at any suggestions from the Democrats that they would look to remove the Filibuster from the next Senate session.

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

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

Stay safe and well

Paul Green

05/01/2021

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Ravenscroft: A post-pandemic boom is possible…

A blog cut and pasted from an email received from Kevin Boscher, Chief Investment Officer at Ravenscroft, late yesterday afternoon, 30/12/2020.

A post-pandemic boom is possible…
 As we approach the end of an extraordinary year, in which nobody could possibly have predicted the unprecedented events that have unfolded, it is time to look forward to what 2021 may hold in store for the global economy and financial markets. The good news is that I remain optimistic that we will likely see a recovery boom over the next year or so and that this will be a positive backdrop for equities, in particular. It is true that most stock markets have already recovered strongly from their March lows and that a considerable amount of good news may be priced in already. In addition, with Europe and the US struggling to cope with a resurgence in the virus, which is necessitating further restrictions and threatening the nascent pick-up in activity, it’s also clear that the global macro environment remains challenging. However, despite this I believe that the outlook remains very supportive for both economic activity and financial assets.

History has repeatedly shown that equities require three main attributes to generate favourable returns; decent growth (both economic and earnings), plentiful liquidity and reasonable valuations. Beginning with the growth outlook, activity is recovering much better than expected with Asia leading the way. For example, retail sales in the US and Europe have not only clawed back all of their lost ground, but have made new highs. This is largely thanks to the “shock and awe” monetary and fiscal support from all of the key global policymakers. However, it is also partly due to the fact that consumers and businesses have quickly adapted to the new environment, thanks largely to the use of technology

Effective Covid-19 vaccines will unlock tremendous pent-up demand around the world as everyone is able to live a more normal life again. As savings rates have risen dramatically in the US, Europe and elsewhere over recent months, this will help fund a consumption boom over the next year or two.

At the same time, companies will need to increase investment to keep up with accelerating demand and boost productivity whilst governments will continue to spend heavily, financed by central banks. Global trade is also picking up at a material pace. Hence, all engines of growth will be working in tandem to fuel the boom.

Another positive factor is that although this pandemic-induced crisis is a transitory shock, like most natural disasters, it has resulted in structural shifts in policy.

This will make the recovery story very different from the post-Global Financial Crisis (GFC) recovery of 2009, when the world economy was plagued by a badly damaged banking system in the West, prolonged deleveraging and a collapse in Chinese investment spending.

This resulted in a long period of sub-trend growth, a sustained deflationary threat and a secular downturn in commodities. The global economy is recovering fast but governments and central banks are still worried about a “double dip” and renewed weakness and will continue to inject larger amounts of money into the economy.

So far, fiscal support has largely been focused on providing income support for individuals or businesses. Going forward, the emphasis will shift to rebuilding the economy and boosting long-term productivity and growth through investment in infrastructure, digitalisation of the economy, upskilling and environmental projects. This additional fiscal support, which will be financed by central banks, will simply add more fuel to the potential recovery in spending and investment over the next few years.

The increased infrastructure spending will also likely lead to a significant pick-up in construction activity, which in turn should be good news for commodity prices.

Two other features are supportive of the growth story. I expect the dollar to depreciate further over the next few years as the Fed keeps rates at zero whilst maintaining its bloated balance sheet, since real rates are lower in the US than in both Europe and Japan and because the magnitude of the “twin deficits” dwarfs any other major economy. Secondly, whilst the Brexit agreement will still bring about considerable disruption to trade and commerce across both the UK and Europe, it should result in a much better outcome than many had feared. A strengthening world economy is clearly positive for corporate profits and equities. Earnings have generally held up better than expected this year and analysts have already revised upwards their estimates for 2021 and beyond.

With economic growth forecasts also improving pretty much everywhere, we will likely see additional positive revisions for earnings over the next few months.

From a liquidity perspective, this is likely to remain plentiful and helpful for financial assets. Central banks have little option other than to help finance the increased government spending, thereby effectively monetising the debt and keeping financing costs extremely low for governments, corporates and consumers. Global debt levels are at record highs and in excess of 400% of GDP, compared with c. 280% post the GFC in 2009. These levels will continue to rise over the medium term, even as activity recovers. Not only will central banks, led by the Fed, keep interest rates at current levels for several years, they will also continue to expand their balance sheets and enlarge their quantitative easing (QE) programmes in order to absorb the issuance of government debt and support the economic recovery and financial assets. Financial repression is very much intact and bond yields will be kept low across the maturity range in order to force investors further up the risk scale in a search for yield. This is also a supportive environment for corporate bonds, especially high yield and emerging market debt.

All of this newly created money is unlikely to create inflation over the next year or so but it will flow into financial assets and eventually, economic activity. The secular disinflationary forces remain powerful and are a natural result of an ageing and high-income economy, where desired investment gravitates lower and eventually falls below available savings. This is true across Europe, the US and Japan where central banks have tried and failed for over a decade to generate higher inflation. The pandemic has intensified the excess saving problem at the same time as accelerating technological advances are driving down costs and boosting productivity, thus adding to the downward pressure on prices.

Eventually, inflation will almost certainly pick up as aggregate global demand starts to move ahead of supply and as credit demand and the circulation of money starts to accelerate.

However, this would be a welcome development for policymakers as they target higher nominal growth in order to inflate away the debt problem.

Looking at valuations, it is true that the mega-cap technology and growth stocks look expensive, which in turn pushes up the overall valuation of the US markets. However, there are many markets, sectors and stocks, which look good value, both in absolute terms and relative to their own history.

For example, UK equities look outright cheap as do several emerging markets. In addition, small and mid-cap stocks in many markets look attractive given accelerating growth whilst value stocks are at multi-decade lows versus their growth counterparts.

Old economy cyclicals, like industrials, materials, energy and financials, are all well positioned to benefit from a possible boom in economic activity and any sector rotation. Meanwhile, Covid-19 victims, like airlines and hospitality companies, have potentially huge hidden value, which could be unlocked by effective vaccines.

A couple of other factors support the valuation argument; given the unprecedented collapse in demand and earnings during the lockdowns, it is still too early to assess, with any degree of accuracy, the full impact on valuations, either for this year or next. Earnings could bounce back strongly in line with activity. Secondly, equities continue to look good value relative to bonds and cash and this is likely to stay the case for some time to come. Equities can trade on higher valuations for long periods of time when interest rates and the discount rate are so low and negative in real terms.

As already explained, whilst I am optimistic on the outlook, I also acknowledge that the background macro picture remains challenging given the below-trend growth and disinflationary secular forces and the cyclical deflationary Covid-19 shock. For me, the biggest threat to markets or the economic recovery going forward is policy error from any number of sources. For example, should the US fail to implement another effective fiscal stimulus programme or if the Fed doesn’t extend its QE programme sufficiently, this could be problematic. Similarly, if China starts to tighten policy prematurely in order to focus on reducing leverage, credit creation and excess capacity, then this would weaken global growth and add to deflationary forces. Also, any escalation of US/China tensions would be unwelcome at this stage. A second risk is that the planned vaccine programme disappoints in any way, i.e. the roll out is not as quick as hoped, more people than expected refuse to take it or it is less effective than anticipated.

Any adverse media from such outcomes could spook investors and the stock market, although I doubt they would kill the recovery or alter the positive medium term trend. Other key risks include the rise of political extremism, increasing hostility towards China in the West, a possible increase in business failures once government support ceases or an earlier pick-up in inflation than anticipated.

The key drivers for markets over the next year or so will likely be the unprecedented monetary and fiscal expansion together with the success of the vaccines. Assuming this goes as expected, 2021 should be another good year for equities and other risk assets.

As I have written about previously, the core irrefutable and long-term themes, which have performed so well for us at Ravenscroft over recent years, remain very attractive and are likely to generate superior returns for years to come. These include technology, healthcare, the emerging consumer, emerging markets generally and environmental related stocks.

I am also positive on the outlook for gold and commodity-related stocks generally, again as I have previously explained. Some of the more cyclical and beaten up stocks are also likely to perform strongly next year and we will look to benefit from this where appropriate. In the meantime, we remain cognisant of the multiple threats to this rosy picture and will continue to look for surprises which could negatively impact the outlook.

This has been a year like no other from an investment perspective and although it has felt tough at times, I think we are all somewhat relieved at how quickly things have recovered.

I am hopeful that the global economy and financial markets can continue to improve in 2021 and beyond and that we can again generate attractive returns for our clients through a combination of active management, strong research and our thematic approach.

Positive input from Ravenscroft to finish the year on.  Taking a wider view on input this year we generally expect investment returns to be lower for longer and for clients with a lower risk profile, circa 5/10 (‘Low Medium Risk’), a very diverse range of assets will be needed to generate reasonable long-term returns within their risk profile.  Long-term is 10 years plus.

For higher risk investors more equity content will help, but you will experience higher volatility.  This is fine if you have the right risk appetite, capacity for loss and timeframe or flexibility of timeframe to invest.

All the best for 2021 – a happy, healthy, and prosperous New Year to you and yours!

Steve Speed

31/12/2020