Investment Bulletin:
February 2021

This month:

Investors are likely feeling pulled between hope and gloom, with talk of inflationary risks the backdrop to a steady stream of better news. Here our experts discuss the particular bright spots ripe for capitalising on and how to position portfolios defensively too.

Expert investment views:

Reassuring signs are seen in corporate earnings results

A case is made for greater confidence in UK market returns

Asset classes are assessed against the threat of inflation

The defensive qualities of commodities are weighed up

 

Featuring this month’s experts:

1. Earnings results should provide the reassurance markets need

Insights from:

Markets long for optimism, and the fourth-quarter earnings season results will be welcomed by all. Whilst equity markets are forward-looking and among others the FTSE 100 is already looking beyond the current lockdown in anticipation of improving dynamics later this year, these reported earnings should provide reassurance to markets that fundamentals are increasingly improving.

Hearteningly, what we can see from the 2H 2020 results released so far is that all sectors—while still posting negative earnings growth year-over-year—are beating expectations. As you dig down into the sector-level details, here are some things to watch out for:

Banks – Following a significantly better-than-expected third quarter, we anticipate the fourth quarter will also surprise positively. Despite banks’ recent performance, their valuations remain attractive, and they should enjoy significant earnings growth in 2021.

Looking forward, we project 2021 will bring significant earnings growth of around 55% for the FTSE 100. The lion’s share of this revival will likely be driven by financials, energy, and industrials

Energy – Although the oil price continued to climb through the fourth quarter, we anticipate the energy sector will provide mixed results at an earnings level. However, energy should remain to be a major contributor to the FTSE 100 earnings growth in 2021.

Leisure and retail – Clearly one of the sectors most affected by the coronavirus pandemic, leisure is likely to continue to see weak results. Meanwhile, online retail should post much better results than more traditional bricks-and-mortar retailers.

Looking forward, we project 2021 will bring significant earnings growth of around 55% for the FTSE 100. The lion’s share of this revival will likely be driven by financials, energy, and industrials. Nonetheless, we anticipate positive earnings growth from all sectors this year and our year-end target for the FTSE 100 is 7,300.

UBS Wealth - Caroline Simmons

Caroline Simmons

UK Chief Investment Officer at UBS Global Wealth Management

2. UK Relief

Insights from:

The UK managed to seal a last gasp Brexit deal with the European Union on Christmas Eve – although any solution is far from perfect, and we are starting to see teething problems in the real world with some empty shelves at the shops and friction on transportation and deliveries. Some will argue about the principle or deal; however, from an investor’s mindset, there is a relief that the UK did not slide off a precipice into the unknown of a no-deal Brexit.

On a broad array of metrics, the UK equity markets remain cheap relative to global indices. Weak sterling has compounded this, and subsequently, UK indices have notably underperformed global markets since the Brexit vote. For example, the FTSE 250 index significantly outperformed the MSCI world index in the decade prior to the Brexit vote, but underperformed since by almost 60%!

The UK markets have traditionally had a significant bias toward big financial and oil companies. However, there is the prospect of a refresh of its underlying constituents

The UK markets have traditionally had a significant bias toward big financial and oil companies. However, there is the prospect of a refresh of its underlying constituents. After the dust has settled on the Brexit deal, a variety of companies could well be acquired by higher-valued global competitors. This, combined with numerous listing of companies looking to list on the UK markets now the Brexit cloud has been lifted, has sparked renewed investor interest in the UK.

This gives us greater confidence in UK market returns. 

Benjamin Newton

Investment Manager at Credo Wealth

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Top Tip

This month’s comments highlight once again the difficulty of managing risks while also maximising returns potential. Achieving the optimum balance at times like these calls for a huge amount of expertise, and it’s easy for the amateur to end up too far on one side. You could learn a lot about hidden risks – and the gains you may miss – by having a few professionals take a look at your portfolio. We can arrange this fast and free. All you need do is complete our short questionnaire.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. Should investors be worrying about inflation?

Insights from:

Many thought quantitative easing would be the catalyst for inflation’s return, but a decade on from its introduction there is still little sign of it. Now, worries abound that the increase in government spending around the world alongside ultra-loose monetary policy will at last set the inflation genie free.

We will probably see a short-term rise in inflation as we lap last year’s low oil prices and supply bottlenecks cause shortages of some goods, particularly should we see the vaccine tamed and economies recover. For now, it is too early to tell whether loose monetary policy and any government stimulus extending beyond the pandemic will prove strong enough to overwhelm the deflationary forces that prevailed prior to the pandemic. 

Worries abound that the increase in government spending around the world alongside ultra-loose monetary policy will at last set the inflation genie free

Equities can prosper in an environment of rising prices, particularly if it is associated with economic growth and interest rates remain low. Though not cheap by historic standards, they look more reasonably priced than other asset classes. Gold too has historically been a good asset to own when inflation accelerates and real yields fall. 

Our view is that bonds face challenges in almost all longer-term scenarios, with only inflation-linked bonds offering any value and protection against the potential resurrection of inflation.

James Hambro and Partners - James Beck

James Beck

Head of Investments at James Hambro & Partners

4. Comfort in commodities?

Insights from:

The end of 2020 saw a reactivation of fiscal support for economies and increasing central bank tolerance for higher inflation giving support to a continuation of the global recovery. We believe this suggests that the threat of future inflation risk may be firmly to the upside. We also believe that a persistent inflation threat will need to see a continuation of the strong recovery that we have witnessed so far in the developed world after the current restrictions are lifted as vaccinations are rolled out.

Regardless, the perception of an inflation threat can drive markets and we believe that a defensive position for investors could include from real assets such as commodities. Increased supply might, in our opinion, check the price of oil, but industrial commodities have recently seen higher prices. Few assets benefit from higher inflation, but commodities usually do (although this is not guaranteed), and we believe commodities might offer protection as strengthening demand causes prices to rise.

The perception of an inflation threat can drive markets and we believe that a defensive position for investors could include from real assets such as commodities

Also, most commodities are priced in US dollars so if the cost of importing raw materials increases, then we also believe it is likely that this will be reflected through a weakening in the US dollar, which further supports global growth.

Lastly, commodities tend to bear a negative correlation to stocks and bonds so, in our opinion, might be a useful addition to a multi-asset portfolio and may reduce overall portfolio volatility. However, as with any investment in financial instruments, investors capital is at risk, and investors may not get back the original amount invested.

Hottinger - Tim Sharp

Tim Sharp

Managing Director at Hottinger Investment Management

Important information

The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, 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 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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