Please find below our Investment Market Update as at 7th August 2020.
Blue Sky Investment Market Update
Viewing through different lenses
You can be forgiven for thinking everything is doom and gloom, and whilst there are some awful situations out there, it is important to stand back and view the current economic landscape through a variety of different lenses.
Believing one thread or one line of thinking is dangerous in that it leads to insular thinking and before we know it, our assumptions have become fact in our minds. This in turn can create all manner of biases, many of which we have spoken about before.
I’m often asked how I remain so positive when there is so much turmoil. It’s easy really; besides being a generally upbeat person, it is because experience and research tells me that with change comes opportunity. It’s important to reassess and not ‘anchor’ in the past. In my mind, there is no doubt that there are exciting developments spinning off all the changes that are unfolding. In some quarters, much of the change has been well overdue and a catalyst was required.
Government money is pouring into public sectors services, infrastructure, sustainability and technology. Why they didn’t do this prior to the crisis is another question, but an avalanche of money is stimulating several sectors of the economy. This has to be good news!
“We’re screwed!”
Someone I know well said this to me when listening to an IMF report on the radio way back in May, with regards to the outlook for the global economy.
The predicted figures were indeed awful but just like the predictions from Imperial College around the virus, they can be wide of the mark. To be fair to Imperial College, their most extreme predictions were if we didn’t get any intervention from government and the same goes from the IMF without knowing what stimulus packages will be delivered. Predictions are provided at a given moment in time, without knowing what ‘rabbits may be pulled out of the hat’.
How things will unfold is very difficult to predict and the further out one tries to forecast (in months), the greater the likelihood that we will be wide of the mark.
Biases create further biases
Every day we hear predictions of what is likely to happen, which is then amplified across media channels. Worse still, elements of a report or a prediction are magnified to suit the ends of the editor. In the written press there are shining examples of this. I’m not going to name the papers but I’m sure you know who I mean!
Let’s look at the latest example:
“Bank of England sees slower economic recovery from COVID hit”
The Bank of England were actually upbeat about the outlook!
When you read the detail, whilst the UK economy is likely to shrink by 9.5% this year, the forecasts are significantly improved on what was previously expected, having suggest that it would reduce by some 14%.The headlines though anchor on the slower economic recovery. The Bank of England did say that they believe it will take slightly longer than initially expected, however their anticipation is that it will grow by 9% in 2021. This is great news isn’t it?
Sure, the rate of expected growth in 2021 has dropped from 15% to 9% but we should be pleased that we will likely have less extreme economic swings. If, of course, the figures are substantiated!
The further out the forecasts, the wider the variance in potential outcomes. It’s the short-term picture which is the most important and this is improving. A strong recovery in some areas of consumer spending is expected to drive a rapid rebound over the coming months.
Why we at Blue Sky never predict
We never get involved with predictions. We focus more on guidance. The term ‘forward guidance’ is what we now hear from the likes of the Bank of England and companies when reporting on expected future earnings.
The fund management sector still sees representatives queuing up to predict the future, eager to outshine each other and claim the spoils if by chance they get it right! For us, it’s not about predictions, it’s about steering our portfolios through choppy waters and taking the seafaring analogy further, catching the waves of positivity.
I often think of our good friend Justin Urquhart Stewart at 7IM, a very popular and adept commentator across various media channels. One media outlet came up with a great idea, a few years ago, that would see Justin be challenged by another individual in predicting the outcomes of the stock-market for the following year. Justin didn’t like predicting either but was mildly interested in the proposition.
It’s important to consider the context of the period; a time when the media loved trying to pick the outcome of the Derby or the World Cup according to the behaviour of an animal or bird. Turns out Justin was in competition with a Chimpanzee! Unsurprisingly, he turned the gig down because, guess what, if he’d have won he’d have beaten a chimpanzee but if he’d have lost… imagine the headlines!
Our aversion to predictions is nothing to do with animals but why try and predict what’s going to happen, especially when we have new surprises every single day at the moment. Plotting a sensible course is what it’s all about, maybe with a little bit of excitement along the way!
Let’s look at some more good news
- European companies with the highest ESG rankings are outperforming the broader market so far this year.
- Investment managers last month, increased their long positions on stocks above short ones to the highest ratio in more than a decade according to Morgan Stanley.
- The Monetary Policy Committee has left interest rates unchanged at 0.1%. It said the initial hits from lockdown measures had not been quite as severe as it projected, way back in May.
- The pound has risen against the dollar, its highest level since March, recovering from its lowest level for 35 years.
- The MPC is more optimistic about the outlook for unemployment than it had been in May, predicting the jobless rate would peak at around 7.5% before declining gradually.
- The Financial Policy Committee stated that even with corporate insolvencies set to rise, UK banks’ capital buffers were more than sufficient to absorb losses based on their forecasts.
- Economists surveyed by Bloomberg expect the central bank’s asset purchase target to be increased by the end of the year. This helps offset some of the government’s extra borrowing.
- German factory orders are already back above 90% of pre pandemic levels according to the German Ministry.
- Service industries in the US expanded at the fastest pace since February 2019.
Cautious optimism
For every piece of positive news there are probably at least 10 negative ones but, like I say, it’s important to keep a perspective. LGT Vestra, one of our investment partners, reinforced their stance of being cautiously optimistic regarding high quality global equities, Asian equities and US Treasuries. They also commented on how investors have to be mindful of the dispersion between economic data and the stock-markets. Basically, anchoring on poor economic data means an investor can miss out on the opportunities unfolding across the investment markets.
Short-term considerations
Clearly, there are lots on uncertainties. ITV Plc shares slumped this week as it wouldn’t give any ‘forward guidance’. So, in this case not giving a prediction, impacted their share price. If they had given a prediction and then disappoint down the line, then their shares would have slumped anyway! ITV have had a tough time after its biggest ever drop in advertising sales.
We are going to see lots of headlines, lots of focus on negative company news but as I said at the beginning of this script, it’s really important not to get caught up in the ‘spin’ and stand back and look at the wider picture.
On the world stage, if we do get a vaccine this would turn markets on their heads. The race for an effective vaccine is gathering pace with seven vaccines in phase 3 (the final phase before approval) currently being tested in large scale trials. Scientists, it is believed, are hoping to have a vaccine within the next 12-18 months. In the shorter term, much depends on the US both in terms of their containment of the virus, their spats with China and of course the circus that will lead to the Presidential elections in November.
Summary
We are not really interested in predictions and whilst forecasts can be useful, in such an uncertain time, it’s important to ‘pick our way’ through these choppy waters and not take big polarised positions. On saying this, there are certain sectors we like which look favourable, despite fluctuating sentiment. Change brings opportunities.
Have a scorching weekend!
Best wishes
Gary and the Investment Team
Risk warning
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.