Investment Bulletin:
April 2021

This month:

Experts examine why European equities are set to flourish despite the region’s pandemic woes and caution investors to pay attention to close attention to the numbers in both stock narratives and demographic trends.

Expert investment views:

The case is made for European equities, and in particular financials, green tech and cyclicals

Investors are urged to focus on the numbers, not just the narrative, with “story stocks”

The importance of population trends to the future investment landscape is highlighted

Featuring this month’s experts:

1. Why European Equities?

Insights from:

The scale and pace of the policy response to the pandemic has been significant, increasing expectation of a strong re-opening, and led to sharp increases in economic growth projections for 2021.

We continue to favour value over growth, thereby maintaining our interest in European equities. Although COVID-related headwinds look set to prevail longer in Europe than in the US, UK, or Asia-Pacific, we prefer the valuation of cyclical stocks within European markets that are likely to benefit from the re-opening of trading links with Asia.

Export dependent economies, like many in Europe, are likely to be major beneficiaries of spending, and European luxury goods and capital goods’ companies are expected to see the return of strong demand, in our opinion.

Although COVID-related headwinds look set to prevail longer in Europe than in the US, UK, or Asia-Pacific, we prefer the valuation of cyclical stocks within European markets that are likely to benefit from the re-opening of trading links with Asia

We also believe that the expected investment in “green” technologies in Europe over the next decade, will see the region become foremost in many sustainable energy sectors.

We expect steepening yield curves to provide an environment in which value outperforms growth or, more precisely, financials outperform technology. European banks still play a very prominent role in corporate funding and supporting the growth in the real economy. We believe a European “Big Bang” could prompt financial innovation which would also support the green deal going forward.

We conclude that the structural changes underway within Europe will support European Banks; the re-opening of the global economy will support cyclical goods and services within established export channels to the growth areas within China and Asia; and the embracing of the environmental challenge will push European innovation and growth.

Hottinger - Tim Sharp

Tim Sharp

Managing Director at Hottinger Investment Management

2. Be wary of falling for a good story

Insights from:

At the time of writing, Bitcoin has roughly doubled in 2021 and increased eightfold in the past year. Probably some of that rise has been driven by fear of missing out – or “FOMO”. FOMO tends to build as cycles accelerate and assets rise in value. The gamification of investment platforms and the digitalisation of investing in recent years has given retail investors the tools to participate in markets like never before. Couple this with low interest rates, strong consumer finances and a lack of anything else to do, and there is the potential for assets to enter bubble territory.

Story stocks have been the largest beneficiaries – companies that tell a great story about their potential but where today’s share price appears far removed from the realities of their profit potential. Tesla might be the poster child for this phenomenon, but it is just one of many

Story stocks have been among the largest beneficiaries of this – companies that tell a great story about their potential but where today’s share price appears far removed from the realities of their profit potential. Tesla might be the poster child for this phenomenon, but it is just one of many. Its share price has risen from $75 at the start of 2020 to $900 at its recent peak. We are not disputing the potential for Tesla to be one of the world’s largest car companies but at a market cap of $662bn it is already nearly three times larger than the next largest company, Toyota, and larger than all the rest combined. In 2020 Tesla delivered 500,000 vehicles compared to Toyota’s 2.1 million!

If prices can rise irrationally on the way up, then what happens when confidence subsides, and prices begin to fall? Tesla shares have already fallen 25% from the recent peak and similar moves have occurred in other stocks where retail activity is high, and valuations stretched. Smart investors focus on the numbers and not just the narrative.

James Hambro & Partners - Mark Leach

Mark Leach

Portfolio manager at James Hambro & Partners

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Top Tip

As this month’s comments make clear, a lot of research and expertise goes into a sound investment thesis. It is vital to understand the nuance behind the narrative, no matter how compelling it seems (or how hard it is being pushed in the media) and you will invariably get far better results with more minds on the matter. If you’d like to check your investment strategy, and perhaps hear some contrarian views, simply complete our short questionnaireand we’ll arrange discussions fast and free.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. Population trends for investors

Insights from:

Global population is about 7.8 billion today and is expected to rise to nearly 11 billion by the end of the century. Most of this growth in population comes from emerging markets and Sub-Saharan Africa, in particular. If developing markets aspire to the standards of living and style of life enjoyed by the developed economies of the world, this will put enormous pressure on resources.

Reading investment implications from trends that are as slow to develop as demographic changes can be dangerous. In general, an ageing population is usually expected to be deflationary as the spending power is removed. However, a decline in the working population may see upward wage pressure, which with higher taxes may push up inflation.

In general, an ageing population is usually expected to be deflationary as the spending power is removed. However, a decline in the working population may see upward wage pressure, which with higher taxes may push up inflation

Key to getting through this will be technological advancements, including the use of Artificial Intelligence and robotics. This may require significant capital investment, and the already large tech companies may be best placed to make such investments. Investment in education may be a key factor in achieving the advances needed. The shortage of supply relative to demand may mean the ever upward move in residential property prices comes to an end. While the demographics in the UK are not as daunting as elsewhere, property price adjustment may become evident in the UK as the baby boom generation hits retirement and looks to downsize.

Retirees may sell investments to fund retirement but this may be countered by those in work saving more as they realise the state may not provide the level of support they will need in retirement. Delayed retirement, lower state pension, and higher taxes are all potential solutions, but not likely to be popular vote winners. A set retirement age seems to be a 20th century invention.

LGT Vestra - Johnathan Marriott

Jonathan Marriott

Chief Investment Officer at LGT Vestra

Important information

The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment and financial planning decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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