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