19 January 2021
By John Husselbee, Co-Fund Manager DMS Verbatim Portfolio Growth Funds
As obvious a line as it might be, it is difficult to resist the attraction of ‘vaccine news provides a shot in the arm for markets’ as a succinct review of Q4, offering much-needed hope of a better 2021.
In the UK, we saw the endgame of the four-and-a-half year Brexit fiasco, with the UK and EU unveiling a deal on Christmas Eve that should help markets start 2021 on firmer footing and allow companies to plan ahead and invest for the future. A bitter US election also ended with a promise of a return to more traditional politics under President-elect Joe Biden, potentially alleviating the trade wars that have hit sentiment in recent years.
Markets had become increasingly jittery towards the end of October, with fears of Covid-19 running out of control and fresh lockdowns blunting the positive impact of a predicted victory for Biden in the US. The first days of November brought the long-awaited election, which initially denied markets any of the certainty they craved. Fears of a long drawn-out melee in the US had most investors expecting another challenging month but then came news of a vaccine from Pfizer/BioNTech, which quickly drove the S&P 500 and Dow Jones back towards all-time high territory. Equities were pushed through these levels later in November, and global stocks actually registered the strongest month on record, on the back of a successful trial from US company Moderna and further positive vaccine news from Oxford AstroZeneca.
What recent events have allowed investors to do is recalibrate their expectations for many companies, a vaccine ‘floor’ if you will, creating more certainty around valuations given the fact a return to normality is at least in sight.
Despite rays of light, however, November also brought sobering economic news in the shape of Chancellor Rishi Sunak’s Spending Review, suggesting persistent scars from Covid-19. Figures from the OECD predict the UK’s recovery from the pandemic will lag behind every other major economy apart from Argentina, with the Organisation warning against any cutting of government spending despite spiralling debt levels.
On the policy front, the Federal Reserve and Bank of England both remained in their own particular forms of limbo when they met in December, with Brexit negotiations going right up to the wire and ongoing political infighting in the US, including January’s runoff elections in Georgia, delaying a much-needed stimulus package. The BoE delayed a potential rate cut until the Brexit situation was clear and markets are pricing in a one-in-four chance of a reduction in 2021 to help the Covid recovery along, which would take rates into negative territory for the first time.
Across the Atlantic, Fed officials opted against increasing the bank's purchases of US debt and mortgage-backed securities or changing the composition of the programme, although said it would continue until there is ‘substantial’ progress to recovery, which some market watchers suggested is a tacit extension. That stimulus package did finally come later in the month, with Democrats and Republicans agreeing on the second-largest relief bill in history at close to $900 billion (after March’s $2.2trillion Cares Act), including more help for small businesses and direct payments to American families. Continuing with his scorched earth approach to his last days in the White House, the outgoing president initially blocked the Bill before decamping to Florida and the golf course but eventually signed and avoided a government shutdown.
Given the invigorating effect of vaccine news on markets in the latter part of the year, it is little surprise to find improving sentiment among investors. In the November edition of the Bank of America (BofA) Fund Manager survey, figures revealed falling cash levels among professional investors and a net 46% of asset allocators overweight equities, the highest level since January 2018. This saw an increase in exposure to small caps, emerging markets and value, and emerging markets is the asset class most believe will outperform in 2021, ahead of the S&P 500, oil and gold. Technology continues to be seen as the most crowded trade – and all of these show views shifting towards our long-term thinking.
Initial stronger performance in the ’Biden/vaccine bounce’ came from companies benefiting from the economy reopening, such as consumer and leisure sectors, while those positioned for a stay-at-home scenario did less well, including technology. As stated, positive vaccine news has created more certainty around valuations given the fact a return to normality is in sight.
We have also seen a pronounced value spike – positive for our portfolios given the slight value tilt – but predicting a sustained resurgence for this part of the market has often proved the kiss of death in recent years. As ever, we are cautious about extrapolating short-term data into long-term outcomes but there are undeniably encouraging signs. Exhibit one for the value case is Biden’s expected infrastructure programme and the ‘Green Industrial Revolution’ in the UK, which could be positive for sectors such as industrials, materials, consumer discretionary and – with a potential knock-on impact on bond yields – financials.
Top holdings over Q4 included Fidelity Special Situations as a prime example of this value resurgence and Fidelity Index UK, with the UK market enjoying a stronger end to 2020. We also saw a positive contribution from Schroder Asia Pacific and Artemis Global Emerging Markets, as the region rallied on the expectation of a better trade backdrop with Joe Biden in the White House.
With 2020 showing the lack of value in economic guesswork, what is worth saying as we head into another year? There is clearly considerable economic uncertainty despite vaccine news, with spiralling unemployment and huge debt burdens – and these are global rather than regional issues; for once, most of the world is genuinely in the same boat so we are likely see ongoing collaboration between central banks and governments to support recovery.
After a difficult year – and longer if we consider the shadow of trade wars – 2021 does at least promise the end of three market-influencing factors, which could mean more market clarity than has been the case for some time: the first is the transition from Donald Trump to Joe Biden, the second is a reduction in the impact of Covid-19, and the third is Brexit.
In the US, a calmer approach to international relations should be positive for the rest of the world, after a long period of trade volatility and increasingly protectionist policies. If nothing else, Covid-19 has reminded everyone we are all one species and more can be achieved together than divided. Elsewhere, the hope is that vaccines already announced, and others to come, bring an end to Covid uncertainty and recent market moves suggest investors are looking towards a better future. Finally, after more than four years of wrangling, the Brexit situation has finally reached its end and I echo the view of our UK equity manager at Liontrust Anthony Cross, who has said that once the politicians get out of the way, companies can come in and make the best of whatever situation emerges.
There remains uncertainty in all three of areas but, if nothing else, they should bring more clarity to markets in 2021. This may help to restore the disconnect between stock market hope and economic reality, which, for us, has continued to underpin – and simultaneously undermine – surging stock markets throughout the year. To reiterate, a huge part of record market levels has come from just a few ‘Covid resistant’ technology businesses and if we, at the least, see more certainty return in 2021 (as those obfuscating forces recede), there should be more of a level playing field where fundamentals can shine through. The last two months of 2020 saw broader market performance, including a strong bounce for many deeply bruised value names, and if that continues, there should be stronger support for markets than the increasingly narrow leadership that persisted throughout much of 2020.
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