Quarter 3 Investment Review

09 November 2020

By Ronan Kearney, Investment Manager DMS Verbatim Multi-Index Funds

Market commentary

During the quarter, economic data proved positive in most major economies with some steady progress resuming out of the Covid-19 driven economic gloom.  It remains unlikely a classic V shaped economic recovery will be witnessed as major employers in heavily impacted industries are likely to convert some furloughed workers into redundancy statistics as we head into the winter months and 2021.  The Spanish economy for example has been hit hard.  Closer to home, in the UK, economic data proved broadly positive but the overhang of a still uncertain and unresolved Brexit weighed on markets.  The recovery from Coronavirus in China appears to be gathering pace with better data supporting our contention – although we retain a healthy scepticism for some statistics.

There is little doubt the post Covid world will present differences to what came before.  The way firms do business has changed, some of which is unlikely to revert, and the beneficiaries of the changes are to an extent different.  As ever change brings opportunities for nimble investors.  The potential for some inflationary pressure in the medium term should not be discounted resulting from the largesse of the central bank printing presses and as indicated by the Federal Reserve in their recent communication

Investment Review

It was impossible to foresee the incidence of Covid-19.  However, we were alert to the increasing valuation risks and slowing economic indicators and took action to reduce risk in our portfolios during late 2019 and early 2020.  This move enabled our portfolios to perform extremely well during the market downdraught that ensued.  Consequently, performance relative to peers and benchmark has been pleasing during the time measured.  When market falls were arrested, we increased exposure to risk assets and have enjoyed a positive rebound, again with positive results for shareholders.  We have identified an investible commercial real estate investment opportunity which satisfies demands of liquidity and access to the “new economy”. 

We have replenished the real estate allocation to portfolios with this investment fund.  We remain focused on risks and reward opportunities as we emerge from the Covid-19 pandemic. The outcome is that all 4 portfolios have traded ahead of their respective Investment Association benchmarks during the period. During the next few months exposure to Blackrock (iShares) and Vanguard will be further reduced. A strict focus on expenses should continue to help add to performance.

Market Outlook 

The contested US Presidential election took centre stage, but whoever ultimately takes up residence in the White House early in 2021 will benefit from the strong economic recovery currently gathering momentum. We should not lose sight of human hardship as many firms have been closed with new economic realities dawning within a few short months, but the largest economy in the world has been showing strong signs of recovery in more recent times.  Leading indicators such as copper have shown strong signs of normalising at a price level and oil looks set to trade within a $40-50 a barrel range which is broadly supportive.  Quarter 3 GDP growth accelerated at record levels in the United States, expanding at 30%+, albeit from very low levels courtesy of Coronavirus. 

Now with the breaking news about vaccine effectiveness, global stock prices have a strong tailwind. The UK will however continue to be hampered by an uncertain Brexit and no real technology leaders.  China by contrast continues to post data confirming a robust V shaped economic recovery.  Commercial real estate has shown some divergence with traditional and much-loved sectors such as city centre office and prominent retail assets falling in value whilst the more modern shared workspaces, distribution centres and hubs have been positively rerated.  This seems to be a clear recognition between what the market views as old and new economic drivers and associated realities of deep changes in consumer behaviour.

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.