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

The sharp increase in long-term government bond yields (as bond prices fell, given that they move inversely with yields) over February reflects a growing likelihood of inflation’s influence returning, after a benign decade or-so. Sterling and the oil price continued to strengthen too.

Global

Promising progress continues

Katie Potts, Herald’s manager, provides a wide-ranging review of the operating environment over the pandemic period. She touches on a number of themes, including a view on why public markets will remain critical sources of capital for smaller companies in the US, notwithstanding the far-reaching success of venture capital.
Brunner’s chairman, Carolan Dobson, shares Brunner’s base-case for a strong recovery, though new virus strains could yet slow progress.
Scottish American’s chairman, Peter Moon, discusses the importance within investment management of distinguishing between the short-term prospects for economies and share prices, and the long-term prospects for companies.

UK

Vaccine rollout success fuelling optimism

Denis Jackson, CEO of the manager of Law Debenture, notes that while we saw some bankruptcies, government measures have allowed businesses to stay afloat in some form or another.
John Evans, chairman of JPMorgan Mid Cap, juxtaposes the optimism generated by the vaccination programme that is progressing to best expectations in the UK and the grim realisation that the human and economic effects of the pandemic have proven to be significantly worse than forecasts made this time last year despite public health and economic stimulus packages that would have been hard to imagine a year ago.

We are some way from fully understanding the human and economic impact that COVID-19 will ultimately have

Harry Nimmo and Abby Glennie, manager of Standard Life UK Smaller Companies, discuss why they currently feel pretty positive about the short and long term outlook for smaller companies as we see the continuation of the new economic cycle, which effectively started on 19 March 2020.

Sir Laurie Magnus, chairman of City of London, says that while interest rates remain at a rock bottom level, UK equities offer a much more attractive yield and have scope to build on recent capital appreciation if expectations for profits and dividends are met.

Murray Income’s chairman, Neil Rogan, discusses possible tail and headwinds going forward. On the latter, Neil notes they include further mutations of the COVID-19 virus or a vaccination setback, government policy being unable to lift the economy out of recession, rising interest rates, the massive stimulus leading us into a new era of inflation plus political uncertainty as the US, China, Russia, European Union and the UK spar with each other.

Potential headwinds to the recovery include further mutations and/or a vaccination setback, government policy being unable to lift the economy out of recession, rising interest rates, the massive stimulus leading us into a new era of inflation plus global political uncertainty

Gervais Williams and Martin Turner, managers of Diverse Income, say that were the inflationary outlook to become less benign, then the valuations of many high-volatility market favourites could fall back significantly. The managers note that a change such as this would be favourable for the UK stock market, given that it has few mega caps with very elevated valuations.
BlackRock Throgmorton’s manager, Dan Whitestone, says he remains very excited about the opportunities ahead. Dan notes that the Brexit resolution is the removal of a huge cloud of uncertainty that has significantly impacted valuations across the small and mid-cap universe, and so it would not surprise him at all to see more inflows into this universe.
Peter Jones, chairman of Henderson Opportunities, points out that stock market prices are not correlated to economic activity and managers need to be careful as some company valuations have priced-in better times.

UK valuations remain at multi-decade lows against a number of other markets

Adam Avigdori and David Goldman, managers of BlackRock Income and Growth, add further credence to the UK valuation opportunity that has been widely discussed. They note that valuations are extreme and even on an industry-adjusted basis remain at multi decade lows versus other international markets.

Global emerging markets

The manager of Gulf Investment provides a detailed analysis of the main goings on across Saudi Arabia, the UAE, Oman, Bahrain, Kuwait and Qatar.

Maria Luisa Cicognani, chair of Mobius, says they believe that investors will continue to view emerging markets positively: companies which have learned lessons during the pandemic and have been able to embed efficiency gains by turning to technology improvements are expected to out-perform. Maria notes that valuations in emerging markets continue to be low compared to their developed markets peers.

Emerging markets continue to provide a valuation opportunity

The manager of Genesis Emerging Markets notes that some of the more vulnerable markets that had been hit hard earlier in the year bounced back towards the end of the year, most notably Brazil, Mexico, Indonesia and Turkey.

A number of frontier markets also look well placed

The managers of Aberdeen Emerging Markets share their view that many frontier markets, whilst increasingly marginalised and thus overlooked by most investors, are attractively valued and likely to deliver attractive returns for patient allocators of capital.

Financials

Banks were overly penalised over 2020, given their underlying capital buffers

Nick Brind, John Yakas, and George Barrow, the mangers of Polar Capital Global Financials Trust, explain why the significant underperformance of the financial sector over the past year has been exacerbated by the difficulty investors have found in quantifying the impact on it. The managers consistently believed that the downturn brought on by COVID-19 would be an earnings event for the sector given its underlying profitability and capital buffers, not a capital one, and therefore the fall in valuations was not justified by the fundamentals.

Other

We have also included comments on Europe from European Opportunities andTR European Growth; Japan from CC Japan Income & Growth; debt from CQS New City High Yield; private equity from Pantheon International; hedge funds from Gabelli Merger Plus+; renewables from Greencoat UK Wind and The Renewables Infrastructure Group; commodities from Riverstone Energy and BlackRock Energy and Resources Income; and UK and Europe property from Alternative Income REIT, Custodian REIT, SEGRO, Primary Health Properties, Civitas Social Housing, and Irish Residential Properties REIT.

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March Economic and Political Roundup