Please find below our Investment Market Update as at 25th September 2020.
Blue Sky Investment Market Update
New phase, new financial support
There is no doubt about what’s grabbing the headlines this week. The news has been focused on the latest response to the spread of Covid and much needed restrictions as to how we interact with each other. We are not alone as parts of Europe are also struggling to contain the resurgence. France has reported record infections and Spain, in particular Madrid, is seeing their health service coming under pressure with their ICU beds close to capacity.
The financial response here in the UK has changed. Notably, the budget has been postponed and rightly so. The Furlough Scheme has been successful for the most part but, of course, the government can’t keep supporting businesses indefinitely, especially those who are likely to fail. We now have the winter Job Support Scheme.
At first glance, it would appear to be a good idea, but I fear this doesn’t go far enough in terms of offering support. It is particularly targeted towards those sectors which are struggling, such as the hospitality industry.
The main thrust of the new financial support from the government is as follows:
- A 6 month “Job Support Scheme” to subsidise the wages of people in part-time work
- An extension to Covid loans with flexibility around repayments
- The extension of 5% VAT for the hospitality and tourism sectors
- Fresh support for the self-employed
Stimulus has helped the housing market
It was reported by Bloomberg this morning that sales in homes costing over £1 million doubled last month, outperforming the rest of the market. Wealthier buyers are clamouring for more space outside of city centres. Of course, there is pent up demand and the doubling sounds impressive, but the rise is from quite a low point.
However, there is no doubt that the government’s stamp duty stimulus has been a catalyst for confidence in harmony with the pursuit of lifestyle changes.
It’s important to be authentic
Businesses will be remembered for some time as to how they responded in the crisis. How they treat employees, their customers/clients and how they have communicated to their audience. Those that have done this well, with authenticity, will stand a much better chance of survival but also are likely to be better positioned when eventually we come out of this crisis.
It’s important to be authentic and I believe the real DNA of companies are there for all to see as the layers are stripped back and we see the beating heart of what they stand for. Culture is so important.
Last week BP went to great lengths to convince the market that it wants to turn itself into a clean energy giant. However, the market wasn’t convinced, and shares hit a 25-year low. The move by BP looks like it is a reaction to pressure around climate change and of course falling demand for oil. In other words, it appears like an enforced change and not something which was already in the DNA of the company. Just another example that investors, whilst wanting to make money, are attracted to companies that are demonstrating they want to make a real difference and be a force for good.
Strategic moves in the LGTV model portfolios
We have made changes recently across our internal portfolios here at Blue Sky and our external partners have also been hard at work adjusting portfolios in light of changing dynamics.
Rather than keep too muchmoney in cash, LGT Vestra have deployed money into the markets. They have added to global equity positions and have sought high quality debt purchases.
They have bought the Evenlode Global Income fund which has a proven, repeatable investment philosophy and process. It has just 30-40 stocks which takes a core approach with a focus on large diverse international revenue streams, particularly across the defensive sectors like consumer staples and healthcare where they expect to see superior returns with less volatility than the general market.
Despite the appearance of ‘Income’ in the fund name, it is not entirely focused on generating dividends for investors. The primary focus of the fund is to grow the dividend in real terms on a consistent basis over the long-term, and it achieves this by owning quality companies that generate sustainable growth with limited need for capital reinvestment. By way of example, Intel, Henkel and Medtronic PLC are among the top 10 holdings of the fund.
In the higher risk model portfolios, LGTV have introduced the Evenlode Global Income fund at the expense of the R&M Global Recovery fund because of the likely slowdown in the global recovery over this next phase. This does add slightly to the UK exposure as R&M funds has just a 6% UK holding compared to 20% for Evenlode. However, these are holdings like Unilever, RELX and GSK, companies that are likely to prove more resilient.
LGTV believe that there is a uniquely compelling case for global funds in the current climate of uncertainty caused by the pandemic, where fund managers have the freedom to invest across borders in order to diversify their holdings. It has become clear from the World Health Organisation (WHO) data that different reactive measures put in place by national governments have prompted meaningful variation in the rate of recovery of their individual economies. By selecting active managers in our Model Portfolios, which are able to make use of the diversification across regional borders, we are able to gain from the selective exposure and sequentially, the dispersion of returns.
Don’t just look through a narrow lens
It is important not to just look through the lens of the UK when assessing threats and opportunities. Not everything revolves around the FTSE 100… far from it!
I’ll use a football example if I may, to highlight what I mean. I like my football. I believe I’m pretty good at knowing what’s going on, although my Fantasy Football League scores would suggest otherwise!
However, to my surprise this morning, I found out that Bayern Munich beat Seville 2-1 last night in the Super Cup. I didn’t even know it was on. Now, if Liverpool had been in this competition, we would have heard about this for sure but as it didn’t concern an English team we didn’t hear much about it.
The same follows when it comes to economics and markets. An introspective view is not healthy and doesn’t provide a full picture. Be careful not to be sucked in by the doom and gloom!
Have a great weekend, but you might have to get those duffle coats out… those were the days!
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.