Investment Bulletin:
March 2021

This month:

Talk abounds of an equities bubble and an exodus from the technology sector, but there are complex historical and international factors investors need to appreciate beyond the headlines, as our experts explain.

Expert investment views:

Emerging markets equities are identified as potential beneficiaries of reflation

Investors are set on watch for choppy markets, and chances to capitalise on them

Fears of a potential asset bubble are set against further supportive factors

Investors are urged to look to history when weighing up the pressures on tech giants

Featuring this month’s experts:

1. Reflation continues to drive the equity rally

Insights from:

Following Covid-19 new cases peaked globally in January, equities continued to rally from their March 2020 lows. So far this year, in sterling terms, the MSCI All Country equity benchmark index total return (including dividends) is up 1.4%, as optimism grows on a global economic recovery 1.

By geography, the UK market leads the way, registering a 3.5% year-to-date gain 2. UK stocks may have previously been held back due to uncertainty from trade friction in a post Brexit world and an out-break of covid-19 mutations. However, with a third of the population having received their first dose, there are signs that the vaccine is beginning to work to immunise the most vulnerable parts of society against the pandemic. The UK Office of National Statistics reports that in a survey taken in the 28 days up to 18 January, 41% of those aged over 80-plus tested positive for covid-19 antibodies3. Now that PM Boris Johnson has now laid out a road map to open-up the UK economy, the probability that the economy and company earnings can rebound in 2021 after sharp declines in 2020 has increased. This creates an opportunity for UK stocks to continue their outperformance in the coming months.

The rally in stocks has also broadened to other financial indicators that reflect strengthening economic activity (i.e. reflation). For instance, since the March equity low last year there have been sharp price rises in commodities (raw materials), including copper (92%), and crude oil (158%)4. Some of the underlying drivers for a sustainable upturn in commodities are falling into place. These include moving towards the end of lockdowns, fiscal infrastructure plans and an improvement in US-China trade relations under the Biden administration.

Looking forward, we see a favourable backdrop of support for reflation beneficiaries, such as; i) equities over bonds; ii) energy, material and industrials in the value sector over high-growth technology, at least in the near term; and iii) non-US equities like emerging markets.

1, 2, 4 Bloomberg, data as at 10 March 2021
3 ONS coronavirus covid19 antibody data for the UK, data as at 21 February 2021
Smith & Williamson - Daniel Casali

Daniel Casali

Chief Investment Strategist at Smith & Williamson Investment Management LLP

2. Capitalising on choppiness

Insights from:

The first two and a half months of 2021 have shown us a glimpse at the playbook for the rest of the year. Economic data is likely to pick up dramatically as growth returns, but that doesn’t necessarily mean it will be a smooth ride for asset markets.

Our view is that the volatility that we’ve witnessed is likely to remain, which in turn calls for a highly active and tactical approach. To us, this means several things.

Within fixed income markets, our view is to keep durations short and targeted; picking up yield through selected credit markets which haven’t enjoyed the warmth of broad-based quantitative easing (European asset backed and smaller company US high yield are examples here).

Our approach is very much focused on taking advantage of the choppiness that we forecast to take advantages of dislocations and mis-pricings as and when they present themselves

Within equities, we see stock dispersion remaining at very high levels and the market continuing to lurch from high optimism about the strength and speed of the recovery to pessimism that perhaps the recovery will be short-lived, yet long-lived enough to prompt a policy error (i.e. a pre-emptive rate hike) that chokes off growth.

This leads us to favouring active managers on both the value and the growth side, and ourselves being very tactical in how we own them – something we took advantage of in February by taking some money away from our Asian managers (a region which we greatly favour). Valuations of many assets are richer after the stimulus fuelled rise of 2020 which makes broad-based returns likely lower. Our approach is very much focused on taking advantage of the choppiness that we forecast to take advantages of dislocations and mis-pricings as and when they present themselves.

Investment Tips, Investment

Thomas Becket

Chief Investment Officer at Punter Southall Wealth

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Top Tip

Investors might feel strongly bullish or bearish currently. There is certainly lots being said on both sides in the media. Picking a path through such an investment landscape is never a case of easy answers, particularly since so much depends on your risk-profile and time horizon, so I’d always advise getting a firm handle on those before making any strong calls. Expert help is easy and free to find you simply complete our short questionnaire.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. Bubble, bubble, toil and trouble

Insights from:

As markets continue their rise, some have pointed to signs of excess, suggesting we might be entering bubble territory. They indicate huge upward movements in cryptocurrencies, big rises in ESG (environmental, social, governance) themes, heady valuations in some tech companies and worries about the extraordinary story around GameStop and individual investors turning the tables on hedge funds. Tesla, too, has raised concerns, with its soaring valuation.

But even with these signs of froth, we don’t think we’re in bubble territory just yet. Why?

For a start, interest rates are at historically low levels and even with an anticipated blip in inflation later in 2021, we don’t see them rising any time soon. Couple that with governments continuing to support economies on a prodigious scale (think Biden’s $1.9trn stimulus package), central banks providing liquidity through quantitative easing and encouraging news on vaccine rollout, you can understand why investors are feeling bullish. At the moment for equities, it really is a case of TINA (there is no alternative).

At times like this, central banks tend to take away the punch bowl (jack up interest rates) just as the party is getting started. But with the world in pandemic recovery mode, bankers are in no hurry to call last orders. So, pockets of irrationality? For sure. Bubble? We don’t think so

At times like this, central banks tend to take away the punch bowl (jack up interest rates) just as the party is getting started. But with the world in pandemic recovery mode, bankers are in no hurry to call last orders. So, pockets of irrationality? For sure. Bubble? We don’t think so.

Canacccord Genuity - Richard Champion

Richard Champion

Deputy CIO, Canaccord Genuity Wealth Management

4.Could tech companies help stem China’s increasing influence?

Insights from:

The rapid stock price gains in technology stocks over the last 12 months or so cemented a view of their omnipotence that was already causing concern pre-pandemic. Now, these immensely powerful firms seem to be embattled on every front: in Australia, Google and Facebook are being forced to pay for news content shared on their platforms; Russia is accidentally shutting down state websites in its efforts to slow down Twitter, and France plans to make tech companies subject to the EU’s 27 individual authorities rather than one.

Meanwhile, there has been an increasing pressure back home, in the US, to force the breakup of tech companies through the use of antitrust legislation. The process of structural separation is a fairly common one in the US and one that makes sense – why would you allow companies to sell services and then compete with the buyers of those services? The well-trodden path also provides plenty of how-to guides for Congress today, with examples from steel, oil, railways and telecoms.

Although Biden has appointed two well-known Columbia Law professors with well-known antitrust credentials, who are among the most ardent critics of the sector, he is old enough to remember the immediate consequences of the AT&T breakup and recognises the difference between the USSR (closed to the world) versus China (open to the world)

But it’s the last one we should bear in mind. In the 1970s, AT&S was today’s tech giant, ruthlessly gobbling up competitors before striking a deal with the government to legalise its monopoly. Its grip on power was so strong that even the US Department of Defense supported its claim that the monopoly was central to national security. Its breakup saw seven “Baby Bells” created, and while the seven grew again to become two huge players in AT&T and Verizon, the argument is that there was a gap in technological development during the break-up process. Wind forward the clock and similar arguments are being promoted in the face of China’s increasing influence on the world stage, not least because Xi’s party is pledging to provide billions to its local tech industry.

Although Biden has appointed two well-known Columbia Law professors with well-known antitrust credentials, who are among the most ardent critics of the sector, he is old enough to remember the immediate consequences of the AT&T breakup and recognises the difference between the USSR (closed to the world) versus China (open to the world). As such, Biden’s appointments may only serve to provide a warning shot across the bows of the tech conglomerates, as there is still an opportunity for the tech sector to assuage sufficient concerns and avoid the US having insufficient tech prowess to stop China moving forward with its plans.

Nedbank Private Wealth - Rebecca Cretney

Rebecca Cretney

Investment Counsellor at Nedbank Private Wealth

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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