26 April 2021
By Ronan Kearney, WS Verbatim Multi-Index Funds
President Biden’s Covid-19 stimulus package was approved by Congress and will pour an eye popping $1.9 trillion into the US economy. The package will support a variety of measures including individual payments of $1400 and $2800 per married couple, in addition to payments made under President Trump. It is these cash payments which are likely to be spent on goods and services at a time when supplier infrastructure is fragile and underlying costs are increasing. This could provoke inflation. Other areas of spending will support infrastructure renewal plus the provision of integrated so-called green policies to promote a low carbon future. The minimum wage will increase to $15 per hour.
Bond yields have risen for 3 consecutive months in the USA and for similar periods in countries around the world. In Europe, the ECB are controlling the extent to which yields rise to maintain interest payments on national debt at low levels. Rising bond yields destabilise equity valuations and create market volatility. In many ways this is to be expected when economies stage a powerful recovery from a global set back. The eyes of City analysts are focused on inflationary data, as are our own. We do not at this stage envisage a resurgence of significant inflation which will derail the recovery.
Despite a Coronavirus resurgence across Europe the roll-out of vaccines is gathering pace in leading economies and in China the incidence of Covid-19 has all but been eradicated. The efficacy of vaccines is proving a powerful suppressant to new hospitalisations and thus the confidence in a reopening is gathering pace along with the positive economic implications. As we have stated in previous updates, the “new normal” that follows the pandemic will favour certain industries and corporate profiles.
During Quarter 1 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. 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, 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 Factor investing in both the UK and US markets, the HSBC funds that we selected for this sector have added 27% and 35% respectively during the period that we have held them, with an annual investment cost of much less than half a percent at 0.28%. Factor investing continues 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 added some useful value in managing risk. Focusing on the role of property in the portfolio, which is to dampen volatility while adding some performance, the Fortem fund has a sharpe ratio of 0.5, which is significantly better than the previous exchange traded fund that was in the portolio. This of course is because ETF products suffer additional trading volatility compared to fund-based products.
There are 3 key drivers for 2021; US stimulus, Chinese resurgence, and the return of the retail shopper. In the US the Trump administration passed a $935bn stimulus at the end of last year, and the Biden administration has just passed a new $1.9trn package. Analysts expect that this fiscal boost could mean that the US economy surpass its pre-COVID-19 level by the second quarter, which is extraordinary considering the outlook 12 months ago.
In China, which was the only major economy to experience growth in 2020, growth this year could reach another 9%. Clearly this will act as a driver of wealth and economic activity for the whole region, as the World seeks to put C-19 behind them.
Finally, the pent-up demand from consumers in Western economies could be a robust engine for growth. Households have accumulated excess savings of as much as 8-10% of GDP in those economies, significantly more than they would have in normal circumstances. Government support in the form of stimulus cheques and unemployment benefits has dampened the negative effect of unemployment, but nevertheless the larger savings pot has accrued to ‘already wealthy’, who are by nature more inclined and better able to spend. If this is released it could send a wave of money through the economy (so Mr Sunak is hoping!).
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