Please find below our interim Investment Market Update as at 9th April 2021.
Blue Sky Investment Market Update
Recycling is all the rage!
Over the last quarter there has been a rotation from growth stocks, which performed exceptionally well during much of the pandemic, over towards value stocks.
Growth stocks, such as those in the technology sector, are demarcated as those that exhibit above average revenue and earnings growth potential. Value stocks on the other hand, are those stocks that present an opportunity to buy shares below what is perceived to be their actual value. Such stocks are insurance companies and banks.
The UK has a bumper quarter
Leading the way across the main market equity indices has been the UK. In November and December last year we spoke about moving more assets into the UK, which we did, but looking back over the quarter, in hindsight, we could have moved more. On a relative basis, the UK looked cheap but as we all know cheap doesn’t always mean good value.
Whilst we were positive about the UK, we weren’t bullish enough to take polarised positions due to the potential for collateral damage around Brexit. This may unfold in the coming months.
What does the short-term hold?
Of course, we are not focused on managing money over a three-month period! It is interesting that over recent days it is the growth sectors which have shown a resurgence with shares being snapped up because of the short-term correction in prices. Technology being a case in point.
Despite the volatility we have experienced over the last few weeks, we are still very positive on equity growth funds for the next 6 months. Across the portfolios managed directly by our investment partners, there has been a slight movement towards value stocks but as LGT Vestra said to me yesterday, they are still committed to a bias towards growth stocks at this stage of the economic cycle. Legal and General Investment Management are of the view that now is the time to have a 50/50 mix between growth and value. It just reinforces that investing is not an exact science.
The start of a rotation against the pound?
Foreign exchange traders have done well off the back of the strengthening pound due to the success of the vaccine programme. However, we did warn that the enthusiasm may dampen as other countries improve their delivery of the vaccine. A strong pound does have an adverse impact on our global exposure.
As we expected, the pound’s strength against the euro is weakening, with the euro on course for its best week against sterling since September, according to Bloomberg. The euro is being bolstered by the rise in immunisations, France being a case in point – it managed to hit its target of vaccinating 10 million people yesterday, quicker than what was anticipated. The next target is 20 million doses by mid-May, and 30 million by mid-June.
Many hedge funds have closed their bullish positions on the pound this week as a result.
Our new Target portfolio
In recognition of the resurgence of the UK market, we have created our new Target portfolio in a nod to the UK’s recovery prospects but also to small and mid-size companies. Typically, at this stage of the cycle, it is smaller companies which are likely to be the biggest beneficiaries. We already have a 20% exposure to UK smaller companies in our Momentum portfolio, but this allows for a further exposure as a satellite theme to existing holdings.
The Target portfolio consist of 4 funds:
- Baillie Gifford UK Equity Focus
- Liontrust Sustainable Future UK Growth
- Octopus UK Micro Cap Growth
- Slater Investments Recovery
Whilst this portfolio at the moment is UK orientated, we have the ability to focus on any market sectors we feel are worthy of a stronger holding than those in our core portfolios.
We have already had a good deal of interest around this portfolio, and we are speaking to clients about this when conducting our reviews. However, it is not for everyone as it’s quite a dynamic portfolio. If you like the idea of having some measured risk to complement your existing portfolio, please don’t hesitate to get in touch.
It’s not been gilt edged!
Whilst we have enjoyed a bumper time over the last year with regards to the recovery in equity prices, it has not been such a good time for gilts. Typically, gilts are regarded as being reliable steady investments but not over the last year. Between 8th April 2020 and 8th April 2021, UK gilts fell by 4.97% (FE Analytics).
Across our portfolios we have had a low weighting to gilts, preferring instead US Treasuries and inflation protection by way of some diversification and ballast against equity price volatility. The weighting depending on the level of risk you are embracing.
Our Sustainable portfolios don’t hold any UK gilts, preferring instead green and climate bonds, along with US Treasuries.
It has been good to see the broad recovery in the Sustainable portfolios after enduring a difficult period. Both the LGTV Sustainable Balanced and Growth portfolios have outperformed the FTSE 100 over the last month. I will write more about this next week when I write my quarterly investment report.
In harmony with Sustainable stocks, Global Infrastructure suffered but it is also recovering, albeit more slowly. We continue to like this space and despite the recent correction, the performance over the rolling year is just shy of 30% (FE Analytics).
This sector will no doubt be boosted by President Biden’s infrastructure plan which was recently published. Energy and climate spending featured prominently. “It is the largest government expenditure on infrastructure and clean energy in history” said the climate adviser at the White House.
The storm freeze in Texas highlighted the need to invigorate the US’s decaying power grid. The Biden plan envisages using a tax credit to spur the construction of power lines to create a more resilient transmission system. The upgrades to the grid will facilitate a greater integration of renewable and clean energy.
Biden is also wanting an expansion and extension of investment and production of tax credits for clean energy generation and storage. It would be expected that this would further galvanise the sector, creating many jobs in the process. The plan also incorporates Biden’s campaign pledge to set a federal “Clean Energy Standard” which would achieve carbon-free electricity production by 2035.
Biden also wants to pump $174 billion into electric vehicles, in a bid to “win” the market back from China. He wants to kickstart domestic supply chains and vehicle manufacture and, through a programme of grants and incentives, roll out 500,000 chargers by 2030.
A brighter period for our portfolios which is good to see. We are broadly staying with our conviction for global stocks but having investments partners with slightly differing views also creates diversity across our portfolios.
The UK has performed really well over the last three months, but we don’t wish to undertake a major shift in our stance as there is likely to be a number of short-term rotations. Trying to respond to these dynamics could be akin to switching lanes too frequently on the motorway and finding that you’ve ended up in the wrong lane!
Our new Target Portfolio gives added exposure to the UK for those wanting a higher weighting on these shores.
Finally, as myself and a colleague said yesterday “we will continue to follow the money”. We were already convinced about Sustainability and Infrastructure but with an avalanche of investments and funding being announced, this has reinforced to us that we are in the early stages of a huge reformation.
Have a lovely weekend in anticipation of more freedom on Monday.
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.