Economic and Political Monthly Roundup
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A collation of recent insights on markets and economies taken from the comments made by chairmen and investment managers of investment companies – have a read and make your own minds up. Please remember that nothing in this note is designed to encourage you to buy or sell any of the companies mentioned.
Roundup
Small-cap stocks in the UK and US, which tend to be more closely aligned with domestic economies, had another good month. Many other countries, including most of Continental Europe, have not been as fortunate with their vaccine programmes to-date. There were further increases in US 10-year government yields, and a strengthening dollar contributed to a softening in the emerging markets rally.
| wdt_ID | Exchange rate | 3/31/2021 | Change on month % |
|---|---|---|---|
| 1 | GBP / USD | 1.38 | -1.10 |
| 2 | USD / EUR | 0.85 | 2.90 |
| 3 | USD / JPY | 110.72 | 3.90 |
| 4 | USD / CHF | 0.94 | 3.90 |
| 5 | USD / CNY | 6.55 | 1.20 |
| wdt_ID | Indicator | 3/31/2021 | Change on month % |
|---|---|---|---|
| 1 | Oil (Brent) | 63.54 | -3.90 |
| 2 | Gold | 1,707.71 | -1.50 |
| 3 | US Tsy 10 yr yield | 1.74 | 23.90 |
| 4 | UK Gilt 10 yr yield | 0.85 | 3.00 |
| 5 | Bund 10 yr yield | -0.29 | 11.80 |
Global
Cyclical sectors dull tech’s lustre
David Harris, the chairman of Manchester & London, reflects on a relatively tougher period for large-cap technology stocks.
Simon Barnard, Smithson’s manager, provides a detailed take on the relative performance and valuation between ‘growth’ companies and ‘value’ companies.
Andrew Bell, the CEO of Witan’s manager, discusses why financial repression is likely to remain for some years, with interest rates being held at rates that offer virtually no return and, after inflation, will be loss-making.
F&C’s chair, Beatrice Hollond, warns that equity markets have already discounted much of the good news. Any disappointments in earnings or inflation could lead to a sharp setback for stocks.
Helge Skibeli, Rajesh Tanna, and Tim Woodhouse, managers of JPMorgan Global Growth & Income, touch on some of the important investing lessons from 2020.
UK
The UK consumer is in a financially sound shape, which is unusual at the end of a recession
Margaret Littlejohns, chair of Henderson High Income, says that the worst of the dividend cuts may now be over, as those businesses most affected by lockdowns have learned to adapt, although we should not anticipate a rapid bounce back to their pre-pandemic dividend levels in 2021.
Guy Anderson and Anthony Lynch, managers of Mercantile, are particularly optimistic on the outlook for the UK. The economy suffered the greatest fall in economic activity of the G7 last year and so arguably has the greatest upside potential. The managers add that rather unusually, at the end of a recession, the UK consumer is in a financially robust position.
Kevin Allen, chairman of Chelverton Growth, says that in time, the Free Trade Agreement with the EU will be properly implemented and will be adjusted by agreement, to the benefit of all parties.
The withdrawal of government support may lead to a rise in unemployment, potentially to around 7%
Georgina Brittain and Katen Patel, managers of JPMorgan Smaller Companies, focus on several themes. On the risk side, they noted that the economy will decline in the first quarter of 2021, brought about by the third national lockdown, which they expect to be followed by a rise in insolvencies in small to mid-sized unquoted companies, and by unemployment levels potentially reaching 7% when the furlough scheme ends. Inflationary risks are also rising, and the record deficit continues to grow.
William Meadon and Callum Abbot, managers of JPMorgan Claverhouse, also believe the UK represents particularly good value at the moment.
The manager of Aberdeen Smaller Companies Income says that while many businesses will adapt operationally, some sectors will not recover to pre COVID-19 levels. Companies have taken this opportunity to improve operational efficiency; all these aspects could lead to falling employment.
The UK’s successful vaccine rollout should draw in further equity flows, particularly in light of the ongoing discount
Ken Wotton and Adam Khanbhai, managers of Strategic Equity Capital, believe that the progress the UK has made in inoculating its population could stimulate asset allocators to re-evaluate the significant discount being applied to the UK stock market, and UK smaller companies in particular due to their domestic focus.
Global emerging markets
The investment environment in China appears to have deteriorated over recent months
Michael O’Brien, manager of Fundsmith Emerging Equities, pays particular attention to China and India. On China, Michael says that it continues to have specific issues which reduce the number of suitable investment opportunities available and if anything the investment environment has deteriorated. India returned to growth in the final quarter of calendar 2020 and it is noted that India is the largest manufacturer of vaccines in the world.
In the view of Austin Forey, JPMorgan Emerging Markets’s manager, it is not an exaggeration to say that the opportunity set at the level of individual companies is as great as at any time in the last three decades, if not greater.
Private equity
Private equity activity within technology in particular has been rampant
Hamish Mair, manager of BMO Private Equity, notes that this year has seen the private equity market’s appetite for new deals pivoting towards sectors that are seen as offering long term growth. Especially growth that has been little impacted or even enhanced by COVID 19. Specifically, this applies to information technology software and services.
Duncan Budge, chairman of Dunedin Enterprise, says that the Brexit deal has provided its portfolio companies with some clarity.
The manager’s report extract for HgCapital Trust focuses on valuation, where the overall environment has been one of net valuation expansion, albeit with significant volatility en-route.
The pandemic accelerated a trend that saw fewer funds being raised but with a significantly higher average fund size
Oakley Capital’s manager notes that private equity fundraising continued over 2020. However, the pandemic and subsequent lockdowns accelerated a trend that saw fewer funds being raised but with a significantly increased average fund size.
The manager’s report for Apax Global Alpha says that the volume and value of transactions recovered strongly in the second half of 2020. Also, valuations for quality companies continued to be elevated. The private equity market is discerning between those companies viewed as structural winners (e.g. software) and those considered more structurally challenged (e.g. bricks-and-mortar retail).
Other
We have also included comments on the flexible investment sector from RIT Capital Partners and Ruffer; North America from JPMorgan US Smaller Companies and Jupiter US Smaller Companies; Japan from AVI Japan Opportunity, and Baillie Gifford Shin Nippon; Asia Pacific from Schroder Asian Total Return and Pacific Horizon; India from India Capital Growth and Ashoka India Equity; Vietnam from Vietnam Holding and VinaCapital Vietnam Opportunity; biotech and healthcare from BB Healthcare; debt from Secured Income Fund, GCP Asset Backed Income, Axiom European Financial Debt, CVC Credit Partners European Opportunities, BioPharma Credit, and UK Mortgages; growth capital from Schiehallion; technology & media from Allianz Technology; infrastructure from BBGI Global Infrastructure and International Public Partnerships; renewable energy infrastructure from US Solar, Octopus Renewables Infrastructure, Foresight Solar, and Bluefield Solar Income; commodities & natural resources from CQS Natural Resources Growth and Income and BlackRock World Mining; and leasing from Tufton Oceanic Assets.
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