Monthly Market Commentary

Summary

2021 kicked-off with yet another historic moment. Mobs of Trump supporters stormed the US Capitol after the then president demanded support for the claim that he, not Biden, was the real election victor. Despite this attempt to overthrow democracy, the US congress confirmed Biden as president of America. Putting Trump in the rear view mirror might now be made even easier since, following the Capitol Riots, Twitter has permanently suspended his account.

Headlines in the UK painted a largely negative picture as COVID cases escalated. Over 68,000 confirmed cases were recorded on the worst single day, and the UK death toll has now surpassed 100,000. These losses are tragic, but we think it’s important to keep in mind that the outlook is much brighter than the current picture. The approval of the Oxford AstraZeneca is a big step forward. It is cheaper and easier to store than the Pfizer vaccine. The UK vaccine rollout is racing ahead of the rest of Europe, and the ability of COVID to cause further recessions around the world is small and shrinking.

The ongoing vaccine programmes worldwide are an overwhelming reason to be positive. It is increasingly clear that COVID is no longer an unknown problem. The challenges are much clearer. They involve vaccine production, distribution and rollout, all of which are difficult, but solvable. To put the availability of the vaccine into perspective: the estimated supply of the Oxford vaccine in 2021 will be enough alone to vaccinate the entire World’s most vulnerable people.

Markets may already have put COVID-19 behind them. Financial headlines have been dominated by the David-and-Goliath battle between small investors and Wall Street, with GameStop somewhere in the middle. After being hit hard by the pandemic, many institutional investors started shorting the stock. In a bid to get back at the short sellers, small investors came together on Reddit and have inflated it’s price dramatically, costing hedge funds many billions. GameStop, Tesla and Bitcoin are reminders of the froth investors are currently navigating. We’ll continue to look at the long term, rather than becoming distracted by violent movements in localised areas.

Because under the froth, markets have been largely positive through January. Biden wasted no time in unveiling a $1.9 trillion stimulus package and the UK have announced yet more measures to protect badly affected businesses. Companies know that the end is in sight, and they also know that consumers are itching to spend as soon as they can. Despite the inevitable bumps, the world is poised for a year of strong growth.

As things begin to return to normal, the conditions for a strong period of global growth are firmly in place – so our portfolios have decent allocations to equities in order to benefit.  Once growth becomes really embedded, attention will turn to the low level of interest rates, and at some point, central banks will have to begin a hiking cycle. That day is a long way off, but we still think that government bonds are unattractive, and prefer to invest in alternative assets that can still offer defensive qualities.

We have a number of long-term core views that help to guide our investment decisions and allocations within portfolios:

The recovery is almost over – growth comes next… The world has never seen as much coordinated stimulus as in the past nine months. We believe this sets the stage for a strong economic recovery across the world in 2021. The return to growth will occur at slightly different paces in different places – much of Asia is already back on track, the US should have a vibrant start to the year, with Europe finishing strongly. As the recovery continues and turns into an expansion, we want to be exposed to it. Positive for credit and equity.

Our portfolios are positioned for the new economic cycle… We think that the new cycle will require new leaders. Large US and Chinese technology companies will still be crucial as part of the growth cycle, but other industries are now better positioned to benefit, with low cost of debt and a cash-rich consumer desperate for products and services. We think that smaller, more nimble businesses can ride the wave best. Positive for lagging equity.

The virus hasn’t derailed growth… Lockdowns are unlikely to be as severe and as widespread as previously. At the same time offers a concrete way to end this crisis. Looking at the long-term and looking globally, there is more economic good news than bad news – despite how it can feel in the UK at the moment. Positive for credit and equity.

Equities

Equity markets in January were mixed. Emerging markets continued to do fairly well, returning around 3% over the month. Developed market equities had more of a shaky start shrinking by almost 1% over the month. Astonishingly, the GameStop saga had a part to play in this as hedge funds were forced to sell long positions to cover their shorts. In the last working week of January, all of the Nasdaq, Dow Jones and S&P 500 fell by over 3%.

Luckily, this pain is likely to be short-lived. The other main cause of bad developing market performance was likely to have been the Johnson & Johnson vaccine data, which fell short of what markets were expecting. It is reasonable to expect February to be better.

The UK started the month positively but eventually felt the shockwaves from the US. The FTSE initially surged but came back down to just below where it started the year. Despite this, a bad week for the UK’s blue-chip stocks will not drastically change the behaviour of long-term investors.

European stocks fell sharply towards the end of the month. This was largely due to the GameStop battle and worries around the availability of COVID vaccines to Europe. Germany has warned of 10 weeks of vaccine shortages. With the UK vaccine rollout steaming ahead, the EU has demanded that AstraZeneca diverts some of its supplies from the UK to Europe.

Despite how it may feel, the global economy is recovering from COVID, and in the UK we have every reason to be positive. On Saturday, more than half a million UK citizens received a dose of the Vaccine. Outside of the UK, the world is getting better at distributing the vaccine.

Client portfolios are globally diversified and have been positioned to benefit from the economic recovery and stimulus injected into the economy since the middle of summer.

Fixed Interest

Bond yields spiked in January, but this doesn’t necessarily change our view towards them in the short term. Even following the spike, yields remain historically low. We instead focus on alternative investments to provide protection to client portfolios. We continue to hold a low allocation to government bonds in more cautious portfolios with zero exposure in medium to high-risk portfolios.

Corporate bonds continued to provide positive returns to portfolios over the month. We have a preference for bank bonds (AT1 Bonds), which outperformed the corporate bond market over the month. Bank bonds have a similar level of risk to the wider corporate bond market, however, they offer higher returns as many investors remain scarred from the financial crisis. 

We continue to have a preference for Asian High Yield bonds, as returns are higher and default rates have historically been lower than in the US. Additionally, many Asian countries are successfully re-opening their economies without large outbreaks of the virus.

Alternatives

Our allocation to alternatives remains in place to predominately diversify fixed interest exposure given the record-low yields currently available in the market. We tend to avoid traditional alternatives (gold, infrastructure and commodities) and instead opt for strategies that are independent of the global economy.

Looking to the start of 2020, government bonds with the highest yields fell the most throughout the year. This means they provided a greater level of protection to client portfolio when equity markets fell. However, now the majority of government bond yields are close to zero if not below zero. We therefore have a meaningful allocation to alternatives as a source of diversification and protection.

Our alternatives allocation generated returns of c.15% last year and remains well placed to provide protection, whatever the weather – which we’ve seen in January too.

If you would like one of our Advisors to review your finances, are unsure of how your portfolio is performing, or want to look at alternate ways to get a good return on your savings and pensions, please call us on 0114 235 3500 for a free initial meeting.

Our office is operating as normal but we can also offer appointments by telephone or Facetime, Microsoft teams & Zoom.

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