Please find below our end of year assessment of the investment markets as at 20th December 2019
Blue Sky Comment
A Christmas present for the markets!
The Tory victory has done wonders for stock market confidence. It isn’t just the victory which has excited markets, it’s the margin of victory, with the highest majority for some 20 years.
It seems obvious now why there was such a landslide result but after the event it is always easy to be wise. On the day of the election, a Daily Telegraph Poll showed that the Conservatives only had a 5% lead.
As usual, our communication is just commenting on what we see rather than taking any political sides.
So, what has unfolded in the financial markets?
• The pound rose as high as 1.22 against the Euro immediately after the election result before falling back earlier this week to 1.18 and today 1.17.
• Domestic stocks have risen strongly.
• UK credit spreads have tightened. This equates to a reduction in the risk premium investors are being paid for owning a bond.
• Inflation fears have waned.
We have been hearing from L&G IM’s Asset Allocation Strategist, Chris Jeffery. He summarises as follows:-
• It’s a cliché, but markets like certainty. The alternative of a hung parliament would have come with a host of uncertainties about the relationship with Europe, the potential for a Scottish referendum, nationalisation prospects, corporate tax hikes etc.
• A perspective in modern Britain is that over the last fifty years, the Labour party has only won elections when they tacked to the centre ground. Given that lesson is now painfully obvious, the market can be much more relaxed about nationalisation risk both today and for the foreseeable future.
What does this mean for our portfolios?
Firstly, it means that they are rising, with domestic orientated stocks being the main beneficiaries. On saying this, global stocks have also performed due to the US-China trade deal progress. So, a sweet spot for equities.
We communicated recently that the vast majority of our portfolios are globally orientated with a circa 30% holding in the UK. We have therefore had the best of both worlds.
Our investment partners made moves ahead of the election, as did we, in buying more UK domestic companies. L&G IM for example had tilted portfolios in the week leading up to the election and where appropriate, hedging with the pound and adding more UK smaller companies.
LGT Vestra ahead of the election, moved more money into Lazard’s infrastructure fund, a move reflecting what we have been doing at Blue Sky for our internal model portfolios. Here, we use Foresight who offer a nimble approach and considerable expertise in the UK. Although their global infrastructure fund was negatively impacted… down circa 0.5% due to the strengthening of sterling, they bolstered the portfolio with GBP denominated investment companies to prevent any further shocks. Now sterling is weakening they will look to rebalance. The fund has recovered well and pushed on from last Friday.
Foresight also showed their dexterity in their UK Infrastructure fund by buying 3 million shares in a company called HICL the day before the election. The value of these shares rose by circa 6% on the day of the results, helping the Foresight UK infrastructure fund rise strongly.
This is a really good example where active management can work in your favour. We believe in a blend of active and passive investment strategies, but here is a perfect example where ‘actives’ can temper the downside impact but also tap into the upside dynamics.
Moving forward we must think about the potential for crashing out of Europe and a bout of more uncertainty. 7IM believe that their portfolios are well protected with around 30% in foreign currencies. Should uncertainty be amplified and the pound weakens this will actually help the portfolios.
As we have said on many occasions, in terms of our investment strategies, it is what happens on the global stage that makes a real difference, long term. The impeachment of Donald Trump has hit the headlines but the markets have shrugged this off believing that he won’t be found guilty due to the Republican majority in the Senate… a murky business!!
Despite impeachment, the first phase of the trade deal will help the GDP of both US & China with L&G IM estimating that this will add 0.1-0.3% of growth. This improved sentiment is a key driver for the outlook next year.
Whilst politically, ethically and emotionally, we have our varied views, there is no doubt that in the main, the sentiment around business has been very positive, following the election result. In the medium term, markets will refocus on concerns around the UK’s withdrawal from the EU.
In the US, the trade deal is providing an improved outlook for growth, helped by loose monetary policy, in terms of low interest rates and a cash stimulus of circa $500 billion to provide added confidence to financial markets.
Whilst wishing you a very happy Christmas and a wonderful New year, we just wanted to say how privileged we feel to be entrusted to manage your money. We are honoured and proud of what we do and always seek to be open and transparent.
We hope that these communications give you greater a perspective of what’s going on out in the wide world of economics and finance. If you have any suggestions for improving these communications, please let us know. We always appreciate your input.
All the very best
The Blue Sky Investment Team
For further information, please email or call on (01202) 756560.