Please find below our interim Investment Market Update as at 26th March 2021.
Blue Sky Investment Market Update
Are we going to run out of coffee?
Apparently, there could be a shortage of coffee, if the headlines are to be believed. It really depends how quickly they unblock the Suez Canal!
There has been a great deal of news flow around the blockage with a huge container ship, nearly the length of an outdoor running track, preventing all other ships getting through. The focus has been on oil and natural gas supplies but now we hear that containers of Robusta coffee, the type used in Nescafe, are also in the queue. Reports (Bloomberg) suggest that Europe is going to be the worst hit with circa 2-3 weeks minimum delay. So, if you are a hoarder or panic buyer, it’s not toilet rolls you want to worry about but coffee!
On the same page
Firstly, a thank you to Gus (Andrew Dunn) for last week stepping into the breach and writing the Commentary. He pulled together much of our recent thinking and the dynamics across markets whist also reinforcing our views on the immediate outlook. I was asked the other day how centralised our views were, here at Blue Sky. I thought it is worth reiterating that as an Investment Committee we meet every Tuesday to discuss the performance of our respective portfolios, to discuss recent market dynamics and share research that we have individually undertaken. We have a centralised research register and daily we are receiving prudent information from our Investment Partners.
Global equities slip
It is a peculiar time at the moment with equity markets lacking direction. With equities having surged since the depths of the Pandemic, it feels like there is a waiting game, and in many cases, the markets are hoping earnings and economic data catch up to justify valuations.
Of course, there are other factors at play, all of which Gus and I have covered off in recent weeks. The uncertainty has led to a rotation into safer havens; in the US this means government bonds and the dollar. Interestingly, the dollar has strengthened against the pound in the last few days, and this has helped to reduce the impact of the recent slip in equity prices.
As we know, there is a risk around inflation and rising interest rates in the US, plus equity markets are trying to interpret what this means and the extent of the risk. The Federal Reserve appear confident that inflation will remain under control, but the Bond markets are saying otherwise.
The signs are good for the UK
I’ve mentioned the upbeat comments from the Bank of England’s Chief Economist before, and once again he has reinforced his stance when he talks about a ‘rip roaring recovery’. “When it comes, it will come fast and it will be large.”
As from 1st April we will be launching a new ‘Targeted Portfolio’ which is designed to tap into a specific area of the markets. Whilst we have previously increased our exposure of UK holdings across our portfolios, this portfolio will start off by embracing UK equities, small and mid-caps, running alongside a UK Sustainable focus. It is classed as a medium to high risk portfolio and so not for everyone, but certainly we will be talking to clients about including this across their holdings where there is appetite. We are happy to provide more information by e-mail if you are interested.
The sentiment on the jobs front seems to reinforce the optimism around the UK. According to the employers group REC, the UK has had its best two weeks since the start of the Pandemic with 146,000 new jobs being posted last week and 179,000 the week before (Bloomberg).
This is a sure sign that companies are beginning to prepare for lockdown rules loosening in the coming weeks. Even Blue Sky are in on the act, having recruited just 6 months ago, we are now seeking another Administrator and may be one other to meet the rising demand for our services.
The Biden effect!
The US is doubling the US vaccine goal to 200 million doses in Biden’s first 100 days. He has also stated that he promises to outspend China on innovation and infrastructure to prevent it from overtaking the US to become the world’s most powerful country.
As reported in Bloomberg this morning, Biden is just beginning to establish his relationship with China, the world’s second-largest economy, after former President Donald Trump imposed tariffs and sanctions and blamed Beijing for the spread of the coronavirus.
There was a lot of conjecture over how electing Biden to the White House would impact pharmaceutical companies with reforms likely. We sold our focused healthcare stocks in our Momentum Portfolio around the time of the election, but we have always been keen on biotechnology. In fact, this was the last of the themes I didn’t get to write about due to the bond markets creating angst in the equity markets.
The biotechnology theme ties nicely into our sustainable leanings and only yesterday I was invited to a webinar with Phoebe from LGT Vestra who hosted two guest speakers from the fund group Alliance Bernstein. One of these was Edward Bryan who is a Senior Research Analyst, responsible for covering the global healthcare sector for Sustainable Thematic Equity portfolios.
It was a fascinating talk with a real focus on Genomics. This is the study of whole genomes of organisms and incorporates elements from genetics. It uses a combination of DNA sequencing methods and bioinformatics to sequence, assemble and analyse the structure and function of genomes. Complicated stuff, but fascinating!
In a nutshell, the cost of genetic sequencing is falling dramatically. Ironically, the Pandemic has helped because it has brought forward technological innovation and has transformed automation. It is this automation which is facilitating a dramatic fall in costs. Edward stated that previously, research, development and implementation used to cost hundreds of millions of dollars and today its only hundreds of dollars.
Automation has allowed the following to unfold:
- The sequencing of more genomes in a given experiment. The more genomes they can compare the better their progress and development.
- Faster diagnostics. Quicker tests will likely see huge growth from diagnostic companies.
- Drug companies will fall over themselves in wanting to leverage the rapid evolution of diagnostics.
- Bio-processing equipment will be in huge demand. At the moment, only a small number of companies make specialised equipment.
- The speed of drugs coming to market is changing. The drugs we see today started their development typically some 12-13 years ago and it was expensive. The anticipation (and the Covid response is testimony to this) is that this timescale will be compressed significantly.
- We will see a far more efficient and precisely targeted healthcare focus across developed countries. We are only seeing the tip of the iceberg at the moment.
- The UK just happens to be one of the most forward-thinking countries in the world when it comes to Genomics.
We will now decide as an Investment Committee how we can include biotechnology in our internal portfolios. LGT Vestra, of course, already use Alliance Bernstein.
This is another example of a rapidly changing world but also rapidly developing opportunities for investors.
I hope all that makes sense. Reasons to be cheerful for sure.
Have a good weekend.
Gary and the Investment Team
P.S. No Commentary next week due to Easter weekend, but watch out for my blog mid-week.
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.