Multi-Index Quarterly Commentary

26 July 2021

By Ronan Kearney, Fund Manager WS Verbatim Multi-Index Fund

Market Commentary
The good news for developed markets has been a powerful near V-shaped recovery from the pandemic.  Equities have enjoyed a buoyant period of growth seemingly ignoring short term woes a few months back and breaking new all-time highs several times during June.  Economic data has been broadly supportive with GDP and Purchasing Managers Indices rebounding from low points and providing sparkling headline figures courtesy of so-called base effects.  Central banks have supported the growth with lots of liquidity and accommodative monetary policy.
Our forecast late last year of a rebound in inflationary pressure has certainly proven correct with CPI figures in most major economies spiking upwards as bottlenecks in supply meets rapidly expanding demand from unlocking populations.  We have seen simultaneous pressure from both generic inflationary types – cost-push, as raw materials saw rapid price increases and demand-pull, as awakening consumers jockeyed to buy desirable products. Central banks have simultaneously delivered an alternative message – inflationary pressure is transitory and will abate as the Covid-19 economic recovery matures.  The Federal Reserve has moved its inflationary target to an average which allows for some significant overshoot whilst remaining on target and avoiding damaging negative policy surprises.  Inflationary data remains firm and the Federal Reserve “dot plot” for June points clearly to two rate rises towards the end of 2023.  
 In UK, notoriously blighted by poor productivity, we have seen data pointing to improvement which is good news indeed.  Europe is enjoying strong recovery and Mrs Lagarde and colleagues at the ECB seem intent to support with ever more liquidity and the provision of Eurozone bonds designed to provide robust economic support to nations in the bloc recovering at different rates.  In Asia, Japan’s recovery remains underway with ongoing lower inflation and China’s economic engine slowed a little in June but remains impressive.  The cyclical rotation in equities, growth to value which has been a theme of 2021 so far, has begun to revert with growth stocks making up some lost ground.  

Investment Review
During Quarter 2 of 2021, we have maintained a broadly stable asset allocation in line with the Hymans Robertson core recommendations. We continue to research index funds across the market to deliver additional value for investors. We have continued to reduce exposure to Blackrock (iShares) and Vanguard. A strict focus on expenses should continue to help add to performance, where we continue to perform well against benchmark. 
The resources that we put into research of benchmarks and asset classes, as well the most appropriate fund to track those benchmarks, has paid off in two of the key asset classes. 
In the main US equity market, the Fortem US fund that we selected for this sector has value compared to iShares 35% and is priced at just 0.40%.  Factor investing has also continued to be a core part of the Hymans asset allocation, and we will continue to look for efficient and excellent value in these sectors.
In the property asset class, the Fortem real estate tracker has been the top performing fund in the sector, and property itself has been one of the highest performing asset classes in the last 12 months.

Source: Morningstar to 20.06.21

Market Outlook  
With vaccination rates close to 50% in the United States and Europe, over 60% in the United Kingdom and beginning to finally accelerate in Japan, we expect that the economic acceleration should continue across the major developed economies through the second half of 2021. Given that the focus for markets has shifted to the implications for inflation, the timing of central bank changes to taper asset purchases and eventually when interest rate rises will arrive. The fiscal stimulus in the US has been significantly larger than expected. The $900 billion stimulus at the end of last year was followed up in March by another $1.9 trillion package. Together, these amount to a massive 13% of GDP. On top of this, a $2.3 trillion ‘American Jobs Plan’ focused on infrastructure spending is now under discussion as well as a $1.3 trillion ‘American Families Plan’. In the U.S., S&P 500 earnings growth beat industry consensus expectations in the first quarter (52% actual vs. 24% expected), and we expect the results for the second quarter to continue in this vein. 
In the Eurozone, the vaccine rollout is gathering pace, and the sustained reopening of economies is on the cards for the second half of the year. The region’s exposure to financials and cyclically sensitive sectors such as industrials, materials and energy - as well as its relatively small exposure to technology should serve it well when economic activity picks up and yield curves in Europe steepen. The UK may see a strong rebound in both GDP and corporate profits if it can overcome the economic headwinds of both Brexit and the pandemic. The UK market is overweight the cyclical value sectors, such as materials and financials, that have been benefiting from the post-pandemic reopening. Financials may also be boosted by the improvement in interest margins as the Bank of England moves closer to lifting interest rates, but may be adversely impacted by the failure of both the UK the European Union to negotiate equivalence for financial services.

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. The contents of this article should not be construed as advice and is for information only. Individual stock selection should only be performed by suitably qualified advisers.