Economic & Political Roundup

Kindly sponsored by Polar Capital and Allianz

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

It was a sombre month for markets as the Coronavirus (Covid-19) spread briskly beyond China. China’s economy effectively ground to a halt and there are now real concerns other large economies will face mass disruption. Government bond yields have tightened as investors see them as relatively safe investments.

 Global

Too early to gauge full scale of the impact of Covid-19

Carolan Dobson, chair of Brunner, said it was impossible to know whether the current outbreak of Covid-19 will remain a human tragedy or also develop into a significant economic problem as global trade becomes disrupted. Herald’s manager, Katie Potts, says the technology sector will be significantly affected if manufacturing continues to be disrupted. She also makes the interesting observation that the premiums being paid by private equity companies for quoted companies has had the effect of moving the quoted market to their valuation levels. The managers of JPMorgan Global Growth and Income say they have been using gearing more cautiously, reflecting their view that historical indicators of a recession, including the yield curve, remain somewhat elevated. James Dow and Toby Ross, managers of Scottish American, reflect on the risk of extrapolating past returns. They highlight the underperformance of a number of so-called “dividend aristocrats” over the past 10-15 years.

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 UK

Low growth and reduced capital spending persist

Dan Whitestone, the manager of Blackrock Throgmorton, says that strong equity markets during the trust’s November 2019 year-end masked increasing levels of volatility and style rotations in market leadership away from growth and into value. Philip Remnant CBE, chairman of City of London says that the end of the UK’s political paralysis is likely to lead to improved business and consumer confidence. He adds that there is some limited scope for further interest rate cuts for the UK, but further stimulus to economic growth could come from an expanding fiscal deficit.

Gervais Williams and Martin Turner, managers of Diverse Income, believe that in time, anticipated renewed capital inflows into the UK will flow down the market capitalisation bands from the FTSE 250 stocks into small, and then microcap, stocks  given that their valuations are so much lower. They expect many of the best performers to be small and micro caps where their results surprise on the upside.

Henderson Opportunities’s managers, James Henderson and Laura Foll, note that the UK economy has been growing at a very modest rate and capital spending is running at low levels. They add that over the last year, it has been the high valuation stocks that have performed the best. When economic growth picks up and some confidence returns, the valuation gap between highly rated shares and much cheaper shares may contract.

Continuing Brexit uncertainty

The management team at Investment Company note that with the finer details of Brexit still to be negotiated, there will undoubtedly be continuing concerns about the UK’s long-term relationship with Europe and the progress made in agreeing trade deals with the rest of the world.

Standard Life UK Smaller’s manager, Harry Nimmo, says that several big uncertainties have been removed. Most importantly a government with a working majority creates more certainty as to the constitutional future of the UK and its relations with the European Union.

JPMorgan Mid Cap’s managers, Georgina Brittain and Katen Patel, say that global investors are slowly revisiting the UK stockmarket, and they still believe that the mid cap arena is not expensive and stands to benefit most from the changed political environment.

Charles Luke and Iain Pyle, managers of Murray Income, note that the new Chancellor of the Exchequer does have the option to stimulate the economy with a programme of fiscal easing and infrastructure spending which has the potential to provide a significant tailwind for future growth.

Finally, Arthur Copple, chairman of Temple Bar, points out that the year did not start well for value investors, with renewed appetite for momentum stocks.

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 North America

US consumer remains a bright spot though industrial side has displayed hints of a recession

Tony Despirito, Franco Tapia and David Zhao, the managers of Blackrock North American Income, say that their base case for 2020 remains positive, albeit slowing, US growth with the trajectory of corporate earnings being a key litmus test for the durability of this business cycle. The US consumer remains a bright spot and they note that the household savings rate is well above the pre-crisis level seen in 2007 and jobs and wages are growing but not at an untenable pace. The industrial side, meanwhile, is showing hints of recession with purchasing managers’ indices slowing globally. They also say that with the benefit of hindsight, 2016 was a classic mid-cycle slowdown.

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 Japan

After ‘three lost decades,’ Japan might finally be re-emerging as an attractive destination for international investors

AVI Japan Opportunity’s chairman, Norman Crighton, begins by reflecting on three ‘lost decades’ that have seen global capital repeatedly deployed in the Japanese markets with the promise of revaluations that were going to be inevitable once the attractive valuations and opportunities were recognised. It is the trust’s conviction that change – meaningful change – is in the wind in Japan: with the political will to apply pressure through the revised stewardship and governance codes, and the increasing presence of shareholder-conscious institutional investors, a slow-but-sure shift is coming about in Japan Inc.’s attitude to corporate governance. Perhaps things really are different this time.

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 Europe

Europe has shown its relative vulnerability to trade disputes, though for now the focus is on containing Covid-19

Alexander Darwall, manager of European Opportunities, compares the performance of European markets and its economy with the US. He says Europe lacks the flexibility and low energy cost policies of the US. Further, its greater vulnerability to trade disputes is reflected in the German GDP growth number, estimated by the IMF at 0.5% in 2019.

Ollie Beckett and Rory Stokes, managers of TR European Growth, say that like everyone else, they do not know how long the impact of Covid-19 will last. They say that it seems reasonably certain that the first half of the calendar year will be weak; understandably leading to ever lower bond yields and a flight to safety. If the health scare can be contained in the coming weeks, we could see a v-shaped recovery.

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 Global emerging markets

Emerging and frontier markets remain an ‘unloved’ asset class. 2019 was the second worst year for frontier market fund flows, despite long-term growth prospects remaining attractive in many markets

Aberdeen Emerging Markets say that emerging market equity is an unloved asset class at present, held back by negative sentiment and low expectations. Anecdotally, they have seen a withdrawal by investors from single country funds and those regions now deemed to be marginal when compared with Asia, which is perceived as the most defensive emerging market region. This has been to the detriment of frontier markets, Latin America and Eastern Europe. They believe the long term prospects in many of these markets are as good, if not better, than those of Asia.

We also hear from Aberdeen Frontier Markets, who note 2019 was the second worst year for frontier market equity fund flows since records began, only beaten by 2015’s net outflow of $2.4bn. The manager’s report states that an ongoing issue for frontier markets has been the recurrence of capital destructive idiosyncratic risk, a theme, this time in Argentina, which was then exacerbated by the evaporating investor confidence witnessed in Lebanon. Looking forward, they believe that Vietnam, Pakistan and Egypt are particularly well positioned today.

The management team Gulf Investment Fund say that with large investments anticipated over the next few years, they expect to see increasing opportunities in banking, infrastructure and industrials. The oil price remains a key risk.

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 Biotech and healthcare

Covid-19 is providing a reminder that healthcare needs to evolve to face new challenges

Randeep Grewal, chairman of BB Healthcare, says Covid-19 provides a tragic reminder of the need for healthcare and that healthcare has to continuously evolve to face new challenges. Randeep also discusses the US election later this year.

We also include commentary from the managers of BB Healthcare, Paul Major and Brett Darke. They take us on a detailed journey through the 16 categories they classify healthcare investments into.

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 Other

We have also included comments on flexible investment from Ruffer; private equity from Pantheon; debt from Riverstone Credit Opportunities Income; renewable energy infrastructure from Bluefield Solar, Greencoat UK Wind and Renewables Infrastructure Group and commodities and natural resources from Blackrock Energy and Resources Income and Blackrock World Mining.

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 Full version

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March 2020 Economic and Political Roundup