Investment Strategy:  Third Quarter 2020 – General Market Review


  • Global stock markets have rallied strongly since the end of March, recouping much of their losses after the huge falls in the first quarter.

  • Markets have ’looked through’ the current recession and are being propelled upwards by an ocean of Central Bank liquidity and a belief that the global economy and company earnings will recover strongly in 2021.

  • Market sentiment is however fragile, market valuations are high and a second wave of infections or sense that the economic recovery is in doubt could lead to renewed heavy falls.

  • The FTSE with its high weighting in ‘old economy’ energy, industrials and financials is a noticeable laggard to other global markets, burdened as well by Brexit and the UK’s poor response to the pandemic.

  • Central Banks and Governments continue to be very supportive. Interest rates will remain near zero indefinitely and QE programmes will support both the economy and financial markets.

  • Government Bonds are still in demand as ‘safe haven’ assets but marked time last quarter. There were strong gains in investment grade and High Yield corporate bonds as spreads tightened.

  • Currencies traded in a relative tight range last quarter; year to date sterling is still a significant laggard to the dollar, euro and yen.

  • The UK Commercial Property sector remains frozen with the daily dealt ‘bricks and mortar’ funds still closed to redemptions.

  • Safe haven gold marked time last quarter trading around the US$1750/bl level, ‘risk on’ oil doubled from its nadir to US$40/bl though still well down from its peak of nearly US$70/bl prior to the pandemic.

Back to life, back to reality

It has been a horrible last few months and the pandemic has still to reach its peak in some areas of the world, notably Central and South America, India and Pakistan. Thankfully the worst appears to be behind us in Europe and the UK and with lockdown restrictions being eased we can begin to look forwards with some hope. We should be able to enjoy our summer, after all, presuming common sense and self-policing prevail, hopefully taking forward the compassion, tolerance and sense of community showed during this worst of times. The markets effectively ended their own lockdown at the end of March and produced strong returns in the last quarter as they ‘looked through the valley’ in anticipation of a strong rebound in growth and earnings next year. Markets, however, remain fragile. The sobering ‘second wave’ rise in infection numbers in the United States has been a reality check and markets need to see continued positive newsflow on future economic growth and company earnings to make further progress. Any sense that the pandemic is returning in force or that the economic recovery is beginning to falter could lead to renewed major falls.

Changes to client portfolios

We have made more wide-ranging changes to our Model Portfolios over the last few months than at any time in the last decade. This reflects that even more so than in 2008 the economic and financial market environment has been totally changed. Broadly, we have:

  • Increased the quality of the Fixed Income component with an increased weighting in investment grade credit where we considered spreads had widened too far and were overstating default risk.
  • Increased the exposure to overseas equities, reduced the exposure to UK equities.
  • Increased exposure to ‘growth’ funds, reduced exposure to cyclical/recovery ‘value’ funds. In term of sectors this has increased the exposure to technology, healthcare, and consumer stocks and decreased the weighting to energy, industrials and financials.

Our intention is to improve the quality and resilience of client portfolios. This meant increasing holdings in funds whose underlying companies have visible, growing and consistent earnings streams, cash rather than leverage on the balance sheet, sustainable dividends, the ability to protect their margins, and revenues that are less economically sensitive to changes in global GDP. We believe that the pandemic has strengthened the case for this style of stock. Essential consumer goods and strong brands will remain in demand and our working and recreational lives will be fundamentally changed by the pandemic. The funds will typically hold stocks which benefit from trends such as working from home, home-based entertainment, e-commerce, the environment and safeguarding our future health

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Conclusion: Into the Unknown…

We have been pleasantly surprised by the strength of the market in the last quarter, expecting a recovery once a floor had been established though not with the strength that has materialised. The policy response from Central Banks and Governments has been key to the stabilisation and recovery and for the next few months we sense we are in a bit if a lull, waiting for evidence as to how the global economy will begin to recover and fearful of a damaging second wave of infections. We expect markets to consolidate over the summer months, trading around current levels but with unsettling bouts of ‘risk off’ volatility. The recovery in equity and credit markets has been impressive thus far but remains fragile, we are in unchartered waters and must never forget this.

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