News from the frontline - December 2020

“Sometimes you will never know the value of a moment until it becomes a memory.”
– Dr. Suess

This is the last “news from the frontline” for this year.

Entering 2020, we were cautiously optimistic. The UK was facing political stability which it had not seen since the Blair/Brown days, and the US and China had signed the first agreement which looked set to dampen trade war tensions. There was also a sense that Trump would win a second term. (Boo-hiss from NM)

Going into January news filtered in about a virus in China, and like many, we did not see what was coming next. In fact, we were agreeing changes to the portfolios which reflected trends we felt would dominate in future years. This included China, Emerging Markets and Asia, as well as technology and biotechnology.

We were also preparing to ‘rebrand’ our Positive Impact Portfolio (formerly the ‘Ethical’ portfolio) which we launched in 2014. This not only delivers a positive impact to society and the environment but has often performed differently to the other portfolios.

Our thoughts and plans changed quickly during February and March. As markets tumbled and economies shut down, the response from Governments and Central Banks was something we had never seen.

At LWM, we emphasised our focus on being there for our clients, hence the sharing of information without forming opinions. When we look back, we can see how valuable some of this information was. We had a clear idea that a vaccine would be announced before the year end, and most of us could see that Trump would not win a second term (I was the only one not convinced on this), but that the ‘blue wave’ was not forthcoming.

Having access to a wide range of sources and views is helpful to sift through. There are always differing opinions, but we see similar threads. We will continue these updates in 2021 if the flow of information keeps coming.

Jupiter – Value Investing Team

This year has seen a flight for investors to quality and safety, and many have considered that value investing is no longer relevant. Value investing at its core is buying companies at cheap prices, and over time history shows that these companies can provide strongest returns in comparison to buying the expensive ones.

Below are some thoughts from the Jupiter Value Investing Team:

The current period is not unusual, the most recent being February 2012 then June 2000, and December 1991. In all cases when there has been a period of underperformance value has outperformed over the subsequent five years
The current period is the longest period of underperformance, (and deepest since 1963)
They believe the two factors that have held back performance are declining interest rates (not low interest rates), and behavioural factors (a flight to safety especially during the current crisis)
The two factors holding back performance will go. Interest rates are unlikely to go lower and using Japanese value stocks as an example these have done well even with low interest rates, so they expect this to repeat in the UK and US. Secondly, investors will move away from the perceived safety stocks, and see value in companies that have been around for many years and are growing earnings
The average outperformance of value over the subsequent 5 years after underperformance is 10.5% per annum. They are not sure when this will happen, but they believe everything is aligned to repeat this
They also highlighted the top ten companies in the MSCI ACW Index, and explained between 1970 and 2020 if you held the top ten then the return would be -2.9% p.a. They think the revenue expectations of the current top ten are too high and history will repeat
In terms of returns they expect the US market based on current valuations to return 3% p.a. over the next 10 years, and the UK around 6% p.a.

L G Vestra

Value vs Growth

November was the best month for the FTSE for 30 years
However, remember that cinemas, airlines, hotels are low margin businesses, and this has not changed. In some cases, it may take years to get to pre-Covid levels
Some parts of the market are out of fashion – commodities and tobacco score low on ESG and this a theme that will not change
Debenhams and Arcadia are cautionary tales of business models that are broken
A shift to value would need a broader recovery in the market and that is not likely to happen any time soon
They do however believe there is a bounce in value rather than a rotation away from quality growth. They believe we will see more broader returns which is better for the market

Market thoughts

Coming in to 2020 they thought they were coming to top of the cycle with perhaps a recession in 2022 or 2023. COVID was a reset and put us back to almost the beginning of the cycle
Trade tensions will likely continue with Biden looking to get a consensus approach against China
Non-approval of the EU Budget and issues with Hungary and Poland have the potential to spill out
Unemployment is a worry, and whether this leads to political and civil unrest, and ultimately a rise in populism
Inflation is something to watch – there might be spikes but areas to watch are responsible investing (people willing to pay more for something) and supply chain inflation
UK is different to many economies because it is much more service based. It is therefore a low productivity economy and unemployment is likely to remain higher for longer

JP Morgan – Guide to the markets

The US is an area of concern, there are 200,000 new cases a day, 100,000 hospitalisations and 2,000 deaths a day. There is slowing activity especially in the labour market. However, they think markets are prepared to look through this because of a potential stimulus and vaccine news
In the UK savings have increased significantly. The vaccine could open the ability for people to go out and spend. If the vaccine is distributed quicker than expected and people rush out to spend, then this could make 2021 a very good year
Where much of this year has been looking at building a bridge to the post-COVID world, now we are in a position where we can see the new landscape, and this is being built into expectations about economies getting back to normal
2020 has been different for investors because intervention into markets has pushed up valuations quickly so it will be harder for investors moving forward
There is likely to be a BREXIT deal but if not, expect further downside on sterling, expect the FTSE 250 to underperform the FTSE 100 and it is unclear how the FTSE 100 will respond

Themes for 2021 and beyond

The level of debt means that interest rates will remain lower for longer. Central banks cannot withdraw this stimulus for some time and will keep rates low to enable debt to be repaid. This means bond yields will be challenged for many years to come
The COVID winner/loser narrative could change. Investors will need to move away from growth and value to structural stories. Oil might recover but the shift to renewable energy shows there are longer term structural challenges. For technology, some valuations are overstretched assuming the post-COVID-19 world continues. So, it will be about identifying the long-term structural winners
Asia’s decade – Asia is benefiting from its ability to recover strongly from COVID. The markets are more mature now and this is creating investment opportunities and the story of the rising middle class will just grow. They believe US Large Cap over the next 10 to 15 years will return around 2% p.a. compared to EM/Asia returning around 5% p.a.
Global momentum towards tackling climate change – all regions will have to intensify efforts to meet climate change objectives (China, UK and EU have all announced plans). They expect a mixture of carrot (incentives) and stick (tax) to drive through change
60/40 model – they think this model needs re-thinking. Instead of using 40% bonds it may include gilts, real estate, infrastructure, and macro strategies to drive the best risk adjusted returns
Central projections and risks – the central view is that the next few months will be difficult, and it will be a long hard winter. However, they believe fiscal support will keep coming and as the vaccine is given, this will release pent up demand

Aviva – Global Team

It is important to remember that on a day-to-day basis so many different things happen; must separate out what is important and therefore it is better to observe and then identify what really matters
For 2021 there are no specific risks identified. Coming into 2020 they were bearish – valuations in places were high, there had not been a recession for ten years etc. Recessions are effectively a reset, providing opportunities and therefore although there will always be noise, markets are in a much better place than they were 12 months ago

Invesco – Economic Team

In terms of the virus, we are not out of the woods yet, 71% of Americans think worse is still to come but the vaccine is a path towards to normality
Need to remember this is a marathon not a sprint, it will take time to get to herd immunity of 70%. In many developed economies the pre-orders exceeded population levels
Forecasts expect a return to consumer and business confidence by the end of 2021, if the vaccine is distributed quicker then a return to pre-COVID levels could be rapid. If there are delays, then it could delay until the end of 2022
In the UK expectations are forecast to recover by the end of 2022, a rapid roll out could see the recovery by the end of 2021 but any downside could delay until end of 2024
No deal Brexit could see a 10% decline on sterling vs the Euro, a 1.4% – 1.6% negative impact on GDP and importantly the markets are not pricing in a no-deal. A no deal will be bad for the domestic economy so this will hit the small and mid-cap parts of the market, with the FTSE100 outperforming. Also, sentiment to the UK will remain weak for a long time
Globally there is still room for equities to catch up where there is an improving economic environment but expect a rocky ride from this point

Fidelity

Thoughts for 2020/2021:

In the near term the outlook is challenging for Europe, and the US faces a double dip recession
The vaccine has the potential to deliver a large bounce as re-openings take place especially in the service sector
The mutation as seen in Denmark is a concern as it means the vaccines developed cannot respond to this
This year has been one of extreme lows and highs and reflects how good policymakers have been in giving confidence to both markets and investors
When considering investments, the crisis highlights survivors, those that are challenged (and will remain so), and losers rather than the value vs growth argument
The elephant in the room is debt. If inflation comes in and central banks are under pressure to increase rates, then debt becomes a problem. We are not there yet but it is something to watch
The traditional 60/40 model of portfolio construction is outmoded. It is more about outcome orientation and being asset class agnostic
Trends coming to fore in 2020 are very favourable for Asia and China, and this is likely to continue and grow stronger in the future

Jupiter Merlin Team

Markets:

Two inflection points in 2020; COVID19 extended the run of mega cap tech stocks up until around three months ago and saw value stocks fall further. The second inflection point was when the vaccines came out and saw a move from mega cap stocks to value
They believe the vaccine news is the start of a new economic cycle which is likely to favour value stocks. There is still money to made in technology and it is about choosing the right stocks
Central banks will be crucial in 2021. Equities like liquidity and there is likely to be lots of liquidity pumped into the system. Low inflation will also be good for equities
Sovereign bonds are a concern as investors can be wrong footed especially using passive strategies rather than good active managers
Vaccine roll out is crucial if this is done badly then sentiment can change very quickly
Even with Brexit they remain positive for the opportunities in the UK
Curve ball thought for 2021; everyone wants a holiday but there are now fewer planes and therefore the one area of inflation will be in ticket prices!! The days of cheap tickets is likely to be over
Estimated cost of saving the NHS based on the shrinking UK economy and different lifeboat schemes is £595 billion this year alone, the annual cost of the NHS is £125 billion per annum
Poland and Hungary delaying the EU recovery fund, summit in December to resolve this likely to be forced through
Carefully watching pressure on student loans being written off in the US. Firstly, it shows that Biden will have a lot of pressure from the far left in his party, and secondly if student loans are written off it creates further division within society because the evidence is that those with a college education have better opportunities and earnings power than those that do not

BMO

Vaccine news

UK infections running higher – in England 1 in 80 people have COVID at any single point in time compared to 1 in 2000 in June
Vaccine news is good because we can see a way out now
UK plans 10 million vaccinations per month, Astra Zeneca plans to produce 3 billion doses next year at cost
The UK and US should have vaccinated the society’s most vulnerable and key workers by March, with 30 million vaccinated in the UK by June
During the Astra Zeneca trial no-one needed hospitalisation

Economy

Expect the UK to have a double dip recession
Over 1 million migrants have left the UK this year, and unsure how those gaps will be filled
Lots of companies have been kept alive by furlough, loans etc and expect to see bankruptcies next year
Expect interest rates to remain low which is good news for risk assets
As restrictions are eased, for those who have jobs, then we should start to see a boom in spending

The Conversation – Life with the vaccine: a look ahead

Panel discussion with leading UK scientists:

Vaccine likely to be distributed based on a hierarchy of needs which includes – key workers, care homes, vulnerable, age etc. This will depend on the country; in the UK it is likely to be based on age
Global surveys show on average 70% of people intend to take the vaccine, 20% are concerned about the vaccine and 10% are opposed to it. Lower income and ethnic minority groups have a higher rate of concern
Concerns are around safety, speed of development and side effects. Governments therefore need to build trust and confidence and consider how the message is distributed. It may be that messaging has to fit different groups of people
Mandatory vaccine might apply to those working in high-risk areas like care homes and intensive care staff, but mandatory vaccines have the potential to undermine any trust and confidence Governments might try to build
Although the vaccines are new the science/technology has been tested in the case of the Oxford team for over a decade and for the others nearly 20 years
Vaccinating millions of people will take time, it cannot happen overnight. We might start to see some of the benefits by the Spring but believe we will need to keep the right behaviours for most of 2021
The vaccine is not 100% protective and may provide protection for only 18 to 24 months. It may be that masks become the norm in society
The vaccine is not a silver bullet, we need to be prepared to live with the vaccine and virus for a long period of time
It could be that we need a certification of vaccination to go to certain places, this is not new, and many countries already require this

US Focus Seminar – Artemis, Baillie Gifford, Brown Advisory and T Rowe

Vaccine

Efficacy of the vaccines is remarkable and far beyond any expectations, this opens a more rapid return to normality
Believe there will be a rapid roll out of vaccines once approved
Main concern is how the virus mutates, and this has the potential to put us back to square one. However, the mutation rate does seem to be lower than other viruses

US at a glance

Election result (President Biden and likely Republican Senate) is market positive (awaiting Georgia run-off election result)
Corporation taxes unlikely to rise and President Biden’s cabinet less likely to be business unfriendly
Economy and corporate earnings continue to be stronger than expected
Smaller companies historically cheap vs large companies
Economic policy favours domestic companies
Federal Reserve supportive of economic growth
Despite rising Covid cases, unlikely to see national lockdown
Consumers saved over $1 trillion between March and September which is unusual in a recession
Applications for setting up new businesses have gone from around 600,000 to 1.4 million in 2020

Articles

About the Oxford COVID-19 vaccine – click here

Oxford COVID-19 vaccine follows its programmed genetic instructions, independent analysis finds – click here

How mRNA vaccines from Pfizer and Moderna work, why they are a breakthrough and why they need to be kept so cold – click here

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.