Please find below our Investment Market Update as at 13th November 2020.
Blue Sky Investment Market Update
It’s been an interesting few days!
- The largest economy in the world has a new President… although the one in residence won’t concede!
- Supposedly, we have a vaccine for Covid 19 nearly ready to go.
- Closer to home, their appears to be fractures within government around the handling of the Covid crisis and no doubt, the UK’s immediate future.
- The furlough scheme has been extended to March.
- We are only weeks away, if not days, from having to agree terms on a Brexit deal or face a ‘no-deal’. Biden has made it very clear as to his stance on upholding the Good Friday Agreement.
So, how have the investment markets reacted?
Well, the best performing developed country over the last 7 days has been the UK. Whilst we have gradually reduced our holding in UK assets, I did mention last week that UK equities are lagging their developed market counterparts and once we have a clearer idea around Brexit, we may look to reposition elements of our portfolios back towards the UK. We’ll continue to watch this space carefully.
The main catalyst was the hope around the vaccine with banks and property companies leading the charge. On Monday, the FTSE 100 had one of its best days since the Covid crisis rising by circa 5%. The ‘Biden bounce’, as it was termed, created optimism but when the news broke around mid-day on Monday concerning the Pfizer and BioNTech results apparently having a 90% success rate; stocks went into a frenzy.
The biggest winners tended to come from the areas where shares were previously devastated. Lloyds bank shares rose by 12% but they are still significantly lower than a year ago. Barclays shares ticked up 16%, as did BP at 15% and housebuilder Taylor Wimpey at 19%.
Yet it in the end, it was Rolls Royce which grabbed the headlines with a rise of 44%, but still hugely down in price for the year.
The FTSE 100 over the last 5 days has posted a return of 5.15% and the FTSE Mid 250 6.11%, but unusually, the US has been the laggard with the S&P 500 only up 1.3%.
Source: FT.com 9am 13th Nov.
Feelings of optimism
- There is no doubt that the mood has changed with some light at the end of the tunnel concerning a vaccine. We’ve got to be guarded however as the vaccine has to pass clinical trials and various phases of regulation. There is also the question of how many people will want to be vaccinated.
- Prior to the US election, equity markets fell before the Biden bounce came into effect, but not all sectors were delighted. The technology sector being one of them.
- In the UK, the extension of the furlough scheme came as a relief to many businesses.
- The markets were pricing in a high chance of a ‘no deal’ Brexit but it appears as though there may well be a softening of the approach in a government, which appears to be somewhat divided!
What will Biden bring?
An informative paper has been published by the Investment house T. Rowe Price and they anticipate three main dynamics:
- They expect President‑elect Joe Biden to push for another fiscal stimulus package, including funding for municipalities.
- While Biden supports corporate tax increases, it is far from certain they would be enacted in the next Congress.
- Biden has suggested taking a tough stance toward China on market practices, though he may seek multilateral partnerships to address these issues.
Biden has indicated that he will seek higher levels of federal procurement spending and tax incentives to create jobs and drive economic development by rebuilding critical infrastructure. This push would focus on reducing carbon emissions and investing in clean‑energy technologies, although it could face opposition from Republicans in Congress.
Jason Adams, portfolio manager of the Global Industrials Equity Strategy, believes that, if implemented, Biden’s ambitious plans could accelerate advances in energy efficiency and emissions reductions.
Not a question of evolution but revolution
It was interesting to see the response from LGT Vestra’s Sustainable Team this week.
“Over the past two months, we have seen some of the most stunning and transformational climate related announcements from the world’s superpowers. China has committed to net-zero ambitions by 2060 (only ten years after the UK), Putin has formally ordered cuts of 30% of greenhouse gases (GHG) by 2030 for Russia, and under President-elect, Joe Biden, on 20 January, the US will be re-joining the Paris Climate Change Agreement.
Looking at the finer points of these announcements, we can find some interesting and promising details, particularly from China and the US – the world’s two largest economies.
In November 2020, according to Reuters, Putin formally ordered Russian government to cut GHGs by 30% by 2030, from 1990 levels. Whilst Russia is economically dependent on fossil fuels (energy products are by far the country’s largest export), climate change is a threat to Russia. 65% of Russia’s landmass is the Artic, representing 10% of Russia’s GDP, according to The Arctic Institute.
Biden’s election as the next US President looks to deliver altogether more ambitious and detailed climate goals. Biden looks to commit the US to become carbon neutral by 2050, and for the economy to be both more resilient and more sustainable. On Biden’s first day in office, he will take the US back into the Paris Agreement, although this is likely to be the easy bit.
Biden is targeting $2 trillion of infrastructure to deliver his carbon neutral ambitions. If approved, the spending will be focused across a range of sectors:
- Infrastructure: investment projects such as roads, bridges, green space and water systems to ensure they are able to withstand the impacts of climate change and to improve public health including access to clean air and clean energy.
- Transit: Biden wants to provide every US city with more than 100,000 residents, high quality, zero-emission public transportation by 2030. There are also plans to install 500,000 electric vehicle charging stations, and to ensure all US built buses are producing zero emissions by 2030, including converting all 500,000 school buses to zero emissions.
- Power sector: the creation of a carbon pollution-free power sector by 2025 by spurring the installation of millions of solar panels and tens of thousands of wind turbines.
- Buildings: spur the building retrofit and efficient-appliance manufacturing supply chain by funding direct cash rebates and low-cost financing to upgrade homes and appliances.
- Innovation: drive dramatic cost reductions in critical clean energy technologies, including battery storage, negative emissions technologies, the next generation of building materials and renewable hydrogen. Increase research investments and tax incentives for technology that captures carbon including lowering the cost of carbon capture retrofits for existing power plants, ensuring the market can access green hydrogen at the same cost as conventional hydrogen within a decade.
- Agriculture and conservation: create jobs in climate-smart agriculture, resilience, and conservation, including 250,000 jobs plugging abandoned oil and natural gas wells and reclaiming abandoned coal, hard rock and uranium mines.
In the sustainable portfolios we run for clients, one of the major investment themes is that of the Green Revolution. Circa 20% of a LGT Vestra sustainably-invested portfolio is directly exposed to this theme. Whilst many people think of the first derivative trade to tap into the trend, there is a multitude of investment opportunities across the entire life cycle of the green transition.
Since the start of the year, momentum behind the green transition has continued to gather pace. Exposure to these businesses and sub-sectors in our sustainable portfolios has benefitted performance, however we believe this is part of a sustained long-term trend that will continue to attract attention from policy makers and increasing numbers of investors.
Comment from Blue Sky
We welcome such optimism, of course, but is it unfounded? It is interesting to hear the views of our close investment strategists who, by the way, are all a lot more optimistic than they were a few months back regarding the outlook for the global economy.
The volatility in the markets around the election did materialise but the fall-out was nowhere near what many forecasters predicted.
The vaccine may not be rolled out quickly. The take up may not be as high as many expect. However, what’s important is that this news brings hope and a degree of optimism.
There will be lots of twists and turns but much of the unfolding news supports our positivity around infrastructure and sustainable investments.
Hope you enjoy the Masters… there’s nothing else on TV so if you can’t beat them, join ‘em!
Gary and the Investment Team
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.