Investment Bulletin:
January 2021

This month:

We all like a strong buy or sell message, but unfortunately things tend not to be as simple as that. This month’s expert investment views are essential reading for those wanting to get to grips with the real issues at stake.

Expert investment views:

Supportive factors across several asset classes are explained as markets look up – and ahead

Investors are given two reasons why there is a compelling case for UK equities currently

The need for a nuanced approach is illustrated through Asia-Pacific’s tech story

The underlying factors driving the outperformance of ESG stocks are unpicked

Featuring this month’s experts:

1. Positive signs for several asset classes

Insights from:

Global equity markets finished the year strongly and despite further increases in Covid cases and resultant lockdowns, this trend has continued during the first few weeks of 2021.

Vaccination programs are being rolled out in many parts of the developed world and despite their undoubted logistical challenges, markets appear willing to look beyond the next few months, when year-on-year comparisons will be quite tough, to a time in the hopefully not too distant future, when life around the globe will return to something approaching normal.

Oil prices, having been hit hard during the first wave, have already recovered to last year’s pre-pandemic levels. The recent uplift in prices being driven by the announcement from Saudi Arabia, the world’s largest oil exporter, of an imminent voluntary cut in its daily output.

Markets appear willing to look beyond the next few months, when year-on-year comparisons will be quite tough, to a time in the hopefully not too distant future, when life around the globe will return to something approaching normal

The UK and the European Union finally reached a Brexit deal, and though far from perfect, it is a much better outcome than the disruption a no-deal scenario would have caused. It also removes some of the uncertainty for the UK economy, something which had weighed heavily on both the currency and UK equity market sentiment. Having been one of the worst performing global markets in 2020, the improvement in the UK’s relative performance in recent weeks has been most welcome.

The Georgia run-off elections have given the Democrats slim but effective control of the US Senate. This is widely expected to result in further stimulus measures funded either via tax rises or, as can be seen from the reaction in the US treasury market, increased levels of debt.  However, investors continue to view the current debt burden positively, as it reduces the likelihood of any material increase in interest rates. The continuation of accommodative monetary conditions with low, if not negative, real rates form the basis of a positive outlook for asset prices.

Arbuthnot Latham - Colin Mackenzie New

Colin MacKenzie

Director, Investment Management at Arbuthnot Latham & Co., Limited

2. All change!

Insights from:

I expect that there aren’t many investors who can remember a time when the UK stock market outperformed its global peers over an extended period. It might therefore be a surprise that from 1970 to 2009 the FTSE All-Share outperformed global markets on an annualised basis.

Even if we forget the underperformance of 2009 to 2019, 2020 was yet another annus horribilis for the UK, remaining down more than 15% against many global peers that have shown a positive return. Of course, many will cry: “it was Brexit wot done it”. To a certain extent they would be right.

However, if we look forward, as we should always strive to do, with Brexit, or at least the first stages, out of the way and the resulting no no-deal bounce done, we still feel that the UK has further gains in sight.

If we look forward, as we should always strive to do, with Brexit, or at least the first stages, out of the way and the resulting no no-deal bounce done, we still feel that the UK has further gains in sight

There are two key reasons that we expect the UK to outperform. The first is that we expect to see a rotation away from growth into value. The makeup of the FTSE 100 remains dominated by financials and commodity related stocks. As investors begin to price in substantially higher growth as vaccines are rolled out and we see a return to normality, we would expect a much higher return from value.

The second, and not unrelated point is as noted in the opening paragraph, the UK has been a laggard for many years and is now looking attractive, on a valuation basis to its global peers. Despite the impact of Covid on dividends, we still have one of the highest yields which, along with the strong free cash flow yield combine to make for a compelling case.

Kingswood Group - Paul Surguy

Paul Surguy

Head of Investment Management at Kingswood Group

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Top Tip

It’s difficult for mainstream news stories to bring all the subtleties of investment themes to light, so they can often leave investors with overly simplified messages like “tech is overvalued”. As this month’s experts explain, profit opportunities lie in understanding the nuance behind the headlines. Why not speak free of charge to some expert wealth managers to see what special knowledge they can impart to help your portfolio grow?

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. A bright spot in a gloomy world: Asia-Pacific

Insights from:

Following what has been a truly dismal year for economies, but not markets, most investors expect that last year’s “losers” will be this year’s “winners”. As such, international stocks should outperform US stocks, small-caps should outperform large-caps (especially as small-caps often do well when the US dollar is weakening), banks should outperform tech, and value stocks should outperform their growth peers.

The story should, of course, be more nuanced than that – something that is easily highlighted through the sector story with regard to tech stocks. When people quote the performance of the sector, their focus is very firmly on the US. It’s no surprise then that people believe its 2020 surge in growth has to have limits, given there is little room for the tech giants to grow in their home market. Close to three-quarters of US households have an Amazon Prime account, while over half have access to Netflix. Google commands 92% of the internet search market. Together with Facebook (and its penetration of 70% of the population), the two pull in about 60% of all online advertising revenue.

 

Instead, however, investors are now looking to Asia-Pacific – and China and South Korea in particular – given their more reasonable valuations and since North Asia has coped with COVID-19 relatively well

Instead, however, investors are now looking to Asia-Pacific – and China and South Korea in particular – given their more reasonable valuations and since North Asia has coped with COVID-19 relatively well. Meanwhile, as was seen in the West, tech stocks also saw new revenue and product lines, which led to the increase in the IT sector’s equity weightings within the MSCI Emerging Market Index. Within the MSCI Asia Pacific Index, meanwhile, the four largest stocks are tech stocks. These names are globally competitive. However, Alibaba, Tencent, Taiwan Semiconductor and Samsung Electronics are “only” expected to trade at an average of 25 times estimated profit over the next year, versus the 34 times of the leading US tech giants.

Wealth managers often talk about global diversification. While many still actually have far larger weightings to a home country than a benchmark set by market capitalisation levels would warrant, the opposite is true in Asia. The region accounts for about 20% of global market cap, but for just 4% of the MSCI All Country World Index. Perhaps it’s time for a refocus on new opportunities…

Nedbank Private Wealth - Rebecca Cretney

Rebecca Cretney

Investment Counsellor at Nedbank Private Wealth

4. The future is bright, the future is green

Insights from:

The investment question five years ago was why should I invest in an environmental, social and governance (ESG) manner, but now, the question is why would I consider any other investment?

ESG funds have performed well throughout the last year, but what can this good performance be contributed to?

ESG indices are typically made up of fewer companies that are dependent on market cycles. They also tend to have more companies that are so called “quality” or “growth” orientated, which have delivered relative outperformance compared with cyclical stocks during the COVID crisis.

In bull markets some companies borrow heavily against their balance sheet, but find when cash flow dries up, they struggle to survive. When properly assessing the E, S and G factors however, a high level of borrowing would raise warning signals over governance.

In bull markets some companies borrow heavily against their balance sheet, but find when cash flow dries up, they struggle to survive. When properly assessing the E, S and G factors however, a high level of borrowing would raise warning signals over governance

In a crisis like we’ve seen over the last 18 months, there has been a flight from more risky companies like these to those which are seen to be more resilient.

For these reasons, ESG stocks have shown their worth in the immediate shock of the COVID crisis, both in terms of resilience and diversification benefits, and are likely to be a strong position when markets recover.

As with any investment, these gains are not guaranteed after the pandemic, but we believe growth themes such as climate change, healthcare and digitalisation will be more relevant than ever. We have been and will continue to be big advocates of long-term responsible investing.

Ines Uwiteto

Private Client Manager at 7IM

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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