Please find below our Investment Market Update as at 20th November 2020.
Blue Sky Investment Market Update
The Biden bounce, the Vaccine vault… now what?
Don’t you just love the artistry in the world of economics and investments?
There is no doubt that there are more reasons to be cheerful than a month ago. Here in the UK however, we now have to navigate the Brexit……! (Perhaps I’ll leave you to insert your own catchy word here.)
The outlook from strategists
There was a good article on Bloomberg yesterday reflecting the more upbeat outlook. They asked strategists about the Stoxx Europe 600 index and their thoughts from now until the end of next year.
On average, the strategists see this index rising by 2.2% from now until the end of 2021. The most bullish prediction implying a 22% gain. The really good news is that collectively, they see very little downside.
Of course, this should not be taken as being representative of stock markets as a whole, because there are so many different dynamics taking place across the sectors in a variety of countries and geographical regions.
Why it’s important to splash the cash!
I’m not talking about being frivolous here, but if you have built up significant cash holdings, now is the time to distribute some of your deposit money into the markets as confidence is beginning to rise. With interest rates close to zero and little prospect of interest rates rising over the next 18 months, now is the time to make some of your money work harder.
You don’t have to embrace significant risk. I’m not suggesting investing into individual stocks and shares, but when we sit back and look at what has happened over the last year, even with the deepest recession in history, there have been good gains to be had across our most cautious funds.
After fund and platform charges, but exclusive of Blue Sky charges, our Sustainable Defensive portfolio over the rolling year from November 20th 2019, has delivered a return of 5.09% and our Sustainable Cautious portfolio 7.24%.
This should not be taken as specific advice but is merely meant to highlight the importance of not being complacent, especially if inflation begins to rise. Leaving money on deposit in this environment will guarantee that you lose money over time, in real terms.
Merger and acquisition activity is an important barometer
Earlier this week, companies announced $40bn of deals in one day as executives put cheap debt and cash reserves to work. Just like individuals, many companies have been hoarding cash as a buffer to the economic downturn, but confidence is clearly starting to return.
The catalyst being positive news of a Covid vaccine and the conclusion of the US elections have encouraged companies to revisit proposed mergers and acquisitions.
An article in the FT referred to the comments of Bill Demchak, the CEO of the US financial services company PNC, stating “even though we’ve had a recent spike in [Covid-19] cases, we have in effect put a floor on the downside case, and of course, both the Fed and the US government responded forcibly with fiscal and monetary stimulus.”
The result of the US elections should not be underestimated because it was feared that if the Democrats had won easily, then they could have controlled both Congress and the Senate which may have led to higher taxes.
The UK needs stimulus, not higher taxes
The above is very relevant when talking about the UK. It has been widely reported that taxes will be hiked in the UK to help pay for the Covid rescue package and of course, Brexit. Reports suggest that the Chancellor is looking to squeeze public sector pay. This will of course be a U-turn from just over a year ago when we were promised an end to almost a decade of austerity.
Obama in his memoirs, criticised the UK government for implementing austerity and consigning the UK to economic hardship. The indications being that we should have instead stimulated growth and business. Hopefully, we are not going to make the same mistake again. Like in the US, UK businesses watch with bated breath for the decisions from the Chancellor in the Spring. Making the tax regime significantly more penal will only serve to hamper growth and limit merger and acquisition activity.
Steady as she goes!
Bank shares have responded well to the probability of a successful vaccine and the likelihood that they will have less bad debt and benefit from a stronger economy.
This week the Secretary General of the Basel Committee of Regulators, Carolyn Rogers, has said it is far too early for banks to take a “victory lap” over their response to Covid-19, arguing that shareholder pay outs should remain on hold until the long-term impact of the pandemic is clear.
She went on to comment in an interview with FT.com, “Banks are not pulling back credit like they did [during the financial crisis] to save themselves at the expense of the broad economy. That’s a good thing, we can give them a gold star and a pat on the back, but we should also remember this is part of their job. Banks are supposed to absorb and not amplify shocks and downturns to the economy.”
This was in response to a clamour for Banks to start paying dividends. When Covid-19 spread throughout Europe and the US in the Spring, global regulators effectively banned dividends to ensure banks retained sufficient capital to continue lending to struggling companies.
“We are all in this suspended reality. As government support programmes expire some businesses and households are going to fare better than others, there will be losses and the scale is unclear at this stage.” Carolyn added, “there is a long way to go.”
A steady hand on the tiller
It’s looking brighter but we must not be complacent. A steady hand on the tiller is what is required, although without a doubt there are opportunities, especially in sectors which are seeing innovation and merger and acquisition activity.
Vaccine hopes have been a game changer in bringing hope and a shot of confidence, and the indications are that we can all look forward to a more fulfilling 2021 all round. Let’s hope so!
Have a lovely weekend. Wrap up warm!
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.