Q2-2020 Quarterly perspectivesTavistock Wealth - Investment Outlook
Welcome to the Q2-2020 ‘Quarterly Perspectives’ publication
2020 Q1 Review
Looking Through the Numbers
The second question is how much the public sector can cushion the blow to individuals, families and corporations during the lock-down period. Here we are also optimistic. The bold monetary and fiscal policy we’ve seen across the globe has helped contain the fall-out and will pave the way for economic recovery. It buys much needed time to get to the other side of the crisis. Until then, we exist in a window of time, on a sea of liquidity, where cash is king and all-eyes remain firmly fixed on the development of the virus and whether the market perception, that the duration of the virus will remain short, proves true.
To Infinity & Beyond
This chart shows the total US Federal Reserve Bank balance sheet and how this has grown through several rounds of quantitative easing following the financial crisis in 2008. We believe additional measures remain likely over the next few months.
We like assets which have proven resilient to the virus and where there is the scope, and willingness, to ease policy further if required. This applies to certain east Asian countries, particularly China given that it has proven to be remarkably resilient to the virus. As such, we remain overweight Chinese equities and bonds. It also applies to US equities. Even though the country is currently going through a rough patch, it remains better positioned to weather the crisis than other developed markets, notably Europe. In fixed income, we like assets that are being targeted by central banks, specifically US investment grade debt given its elevated position in the capital structure and improved liquidity profile.
Finally, we adhere to our investment philosophy that, during this uncertain period, the return-of-capital is as important as the return-on-capital. One way to achieve that is to inject resilience into the portfolios via diversification. As such we continue to hold moderate levels of cash with exposure to inflation-linked bonds, physical gold and sustainable investments which exhibit quality-like factors.
Asset Allocation Outlook
Chart of the Quarter
Liquidity has been our focus through Q1, and will remain so until the spreading of the virus begins to slow. The elevated demand for US dollars has put emerging market governments and corporations under pressure to pay and refinance their debt. We are positioned underweight emerging market debt relative to our benchmark, except for Chinese local currency government bonds which have fared well amongst the turmoil. The liquidity of firms is also the primary driver of our overweight position in investment grade credit and underweight allocation to high yield debt. The Fed’s vast stimulus package has given respite to US credit by acting as a buyer of last resort. This will disproportionately benefit investment grade versus companies lower down the credit curve, which have inferior balance sheets and are at risk of deterioration over the longer term from weaker demand. Furthermore, the dramatic decline in the price of oil will negatively impact oil-producers, a disproportionately large component of sub-investment grade debt. Therefore, we see the default rate in high yield credit rising in the short-term. A rally in safe-haven assets has provided opportunity to take profit and underweight European government bonds as the German commitment to a balanced budget comes to an end and the fractured national response to the coronavirus puts strain on an already precarious European Union. In the US, we maintain our slight overweight to the front end of the Treasury curve where the majority of recent issuance has been focused.
Don’t Fight the Fed
COVID-19 was at the epicentre of global equity markets as they suffered their worst quarter since the Great Recession beginning in 2008. The sharp nature of the sell-off has left dislocations in the market, which gives rise to opportunities. Our decision to remain invested in mainland Chinese equities proved effective. It was one of the only major equity markets not to enter bear territory. As China leads the way in restarting its economy post-shutdown, it is set for further outperformance. Additionally, its government and central bank are in a strong position to enact further stimulus if required. We are overweight east Asian equities and recently initiated a new position in South Korea, which looks to be closely following its Chinese neighbour in containing the virus. Their equity market was recently among the first few to retrace back into bull territory.
EM Asia Rebound
We added to our ‘pivot-east’ theme via new positions in South Korean and Indonesian equity markets. The collapse in the price of oil should benefit both countries given that they are net importers and they were among the leaders back into bull market territory.
Technology remains one of our preferred sectors in the US due to corporate balance sheet strength and record low interest rates. Given the heightened market volatility, we maintain a tilt towards the momentum, minimum volatility and quality factors within our smart beta allocation.
Smart Beta Shows Resilience
With notable exceptions, commodity returns have come under pressure throughout Q1. Volatility in the price of oil and gold resilience have dominated headlines, as markets have been faced with two idiosyncratic shocks: the COVID-19 outbreak and an ongoing production war between Saudi Arabia and Russia. The consequences of this have been widespread, with oil prices falling over -60%. Our decision to remove exposure to oil and gas producers last year largely insulated us from this fall, and we have since increased our equity allocation to oil importing countries. Other commodities have suffered a less severe but nonetheless broad-based fall and ongoing uncertainty may yet prolong the recovery in the industrial complex.
Gold and gold-backed assets have continued to shine amid the chaos. Despite acting more akin to a risk asset for a brief period, the need for gold in a portfolio has been emphasised during this sell-off, outperforming the Bloomberg Commodity Index by approximately 30%. During the month, our shift from producers of gold to the physical asset will improve liquidity, benefit from the global gold shortage and avoid the idiosyncratic factors that come with the mining sector
Outliers Across the Commodity Complex
In currency markets, the COVID-19 induced liquidity crunch drove a dash-for-cash into the global reserve currency, the US dollar. This is because individuals, families and corporations need cash to see them through the lock-down period. The key driving force is global debt, which needs to be paid even as underlying revenue dries-up. The significant rally in the US dollar is a serious issue for the global economy as it tightens financial conditions and disproportionately hits emerging markets. As such, the US Federal Reserve eased monetary policy and the US Treasury opened FX swap lines, improving access to the currency. This policy response proved effective, causing a sharp reversal in the US dollar. Out of the developed market currencies, the UK pound suffered disproportionally given its superior liquidity characteristics in the inter-bank market.
This is a technical adjustment and has not been driven by any change in the underlying fundamentals. The US dollar remains overvalued and we expect it to depreciate over the remainder of the year, especially given the twinned responses of the US Federal Reserve and government backed initiatives.
ESG Investing is often labelled by critics as a ‘fair-weather’ strategy, fine when times are good but one that will crumble when the going gets tough and investors take shelter behind what they know. The experience thus far of ESG-linked assets during the ongoing COVID-19 outbreak, a rare black swan event (low frequency, high impact), is pouring cold water on that argument. Not only did ESG-linked assets outperform their conventional counterparts in Q1, but it was the ‘best-in-class’ SRI strategies (socially responsible investing) that performed most handsomely i.e. the greener the better. An analysis by Morningstar corroborates that outperformance wasn’t simply due to the exclusion of hard-hit energy companies, but in fact largely because of superior stock selection i.e. companies with superior ESG Scores. ESG-linked assets are, at present, earning their ‘all-weather’ badge and with portfolio cash levels elevated, perhaps yesterday’s critics will look to ESG when reshuffling for brighter (but uncertain) times ahead.
The consequences of the ensuing, self-inflicted global recession will be felt for many years to come, especially in the bond market. Money does not grow on trees and the cost of financing these emergency fiscal measures will last a very long time. The next generation will pay a heavy burden in the form of higher debt repayments. Long-term investors such as sovereign wealth funds, pension funds and individual retirees will need to seek investment returns from other markets, namely global equities and commodities. Given the recent sell-off, both markets offer substantial upside in a new reflationary world and are likely to drive portfolio returns in the years to come
The average return of the MSCI World equity index and the S&P Goldman Sachs Commodity index for the 2 -year period following the end of the last 4 recessions in the US have been 19.49% and 22.33% respectively.
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Q3-2021 QUARTERLY PERSPECTIVES
Over the last year the investment team have delivered strong risk-adjusted returns during a period of considerable uncertainty and market volatility.
Tide may be about to turn
The following is an abbreviated version of John Leiper’s article ‘Tide may be about to turn’ for Investment Week magazine. Follow the link and read his views on page 23.
Q2 2021 Quarterly Perspectives
Welcome to the Q2-2021 ‘Quarterly Perspectives’ publication.
Innovation in the ESG Eco System
Tavistock Wealth have come together with MSCI and LSE SU Green Finance Society to discuss Innovation in the ESG Eco System, alongside data analytics with MSCI.
Green Finance Summit 2021
Our Portfolio Manager for ESG, James Peel, was recently invited to provide his valuable insights into “Innovating Towards a Greener Future” as part of the London School of Economics Student’s Union Green Finance Society’s video conference: “Green Finance Summit 2021”.
The Great Rotation
In Nothing Is More Powerful Than An Idea Whose Time Has Come, published in November, we introduced the idea of a Great Rotation across US equity markets. As shown in the chart below, this rotation is playing out in textbook fashion with value stocks outperforming growth by about 20% since the end of last year.
The Unemployment Problem
The Fed’s dual mandate is price stability and maximum employment, but Jerome Powell has been unequivocal that it’s all about the latter.
Q1 2021 Quarterly Perspectives
Welcome to the Q1-2021 ‘Quarterly Perspectives’ publication.
This is the first blog since the holiday break. Whilst travel restrictions meant it wasn’t the holiday that had been planned, we adapted, and enjoyed the opportunity to spend some time together as a family and reflect on the last few months.
Rise of the Underdog
In its latest economic outlook, the OECD increased its expectations for global GDP.
Let the Good Times Roll
Markets are ebullient, and they have every reason to be.
Is the Bond Market Smarter than the Stock Market?
Following on from last week’s blog, the dramatic rotation from growth to value remains in place for now. Early signs of quick snapback into the prior channel have not yet materialised and instead the ratio has consolidated and even shown signs of moving.
Nothing Is More Powerful Than an Idea Whose Time Has Come
On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results.
Anatomy of an Election (So far…)
The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly.
Since the Market Low
The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.
Canary in the Vol-Mine
With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy.
Q4 2020 Quarterly Perspectives
Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication.
Further For Longer
On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little.
Smart Beta Unwrapped
Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights as part of ETF Stream’s video conference livestream: “Beyond Beta Europe Digital: Smart beta unwrapped”.
Life Imitating Art
Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).
Emerging Markets: ETF Stream
Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights into emerging markets as part of ETF Stream’s video conference livestream: “Big Call: Emerging Markets”.
Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.
Let’s Get Cyclical, Cyclical
The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.
In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.
A Speech For The History Books
In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’.
Room to Run
Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.
In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.
A Currency For All Seasons
Having identified, and benefited from, the 7% fall in the value of the US dollar index since late April, we have now turned tactically cautious.
All That Glitters…
The US dollar index, which represents the value of the dollar against a basket of developed market peers, fell through key technical support to its lowest level in 2 years.
This Time It’s Different
There are growing signs that the US dollar may finally roll over.
Q3 2020 Quarterly Perspectives
Despite suffering the worst pandemic in over a century, and the sharpest economic contraction since the second world war, global equity and bond markets staged one of the fastest recoveries of all time in Q2.
Commodities Move Higher
The 10 year US Treasury yield has remained remarkably steady over the last few months, particularly as inflation expectations have gradually risen.
The Bigger They Are, The Harder They Fall
Those stocks that outperformed during the corona crisis are the same ‘winners’ that outperformed before the crisis.
Pivot To ESG
The recovery in US equity prices, from the corona crisis, has been one of the most rapid in history.
The Chinese Tech Structural Growth Story
China’s economy has transitioned, from an industrial export-led model, towards services.
The Commodity Carve-out
Commodities are nothing if not cyclical. They rise and fall in value with remarkable consistency over time.
The Return of Inflation
Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress.
The Powell Pivot 2.0
In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.
Don’t Fight The Fed
Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy.
Market Notes 20th May 2020
Flying the global economy into the ground from 35,000 feet will go down as one of the most difficult and controversial decisions in the history of mankind.
The Liquidity Crisis Is Dead. All Hail the Solvency Crisis.
In response to the corona crisis, global central banks have unleashed a tidal wave of liquidity.
The Who, What, How, Where & Why of Investing
Tavistock Wealth is the investment management arm of Tavistock Investments Plc. The investment team is comprised of 7 highly educated and talented professionals.
Economy ≠ Markets
One question I get from advisers and clients, more than any other, is why global equity markets have bounced back so far.
From Liquidity To Solvency
In the early stages of the Corona Crisis of 2020, the global economy faced a liquidity crisis.
In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63.
ESG in the Spotlight – Earth Day
Earth Day, commemorated each year on 22/04 by more than 1bn people, is the largest annual secular observance in the world.
Market Notes 22nd April 2020
The global economy has been plunged into a deep recession as government leaders struggled with the difficult question of how to deal with the COVID-19 coronavirus.
One Currency To Rule Them All
As the world’s reserve currency, the US dollar is the go-to currency. It is used to price assets, complete transactions and as a store of value.
The beginning of the end?
The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt.
Return-of-capital is as important as the return-on-capital
Last week, we considered the debt story behind the coronavirus. The fear of a large debt overhang, as the economy slows, led to concern that households and companies could start to default on their debt.
Market Notes 23rd March 2020
In the past three weeks, global equity markets have fallen almost as much as in the Financial Crisis of 2007-08.
Market Commentary – March 2020
In the past week, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.
Today, global equity markets have fallen again and yields on developed market government bonds have collapsed even further. In my opinion, there are two diametrically opposed events playing out at the same time.
A Time to Remain Calm
This is a time to remain calm, patient and focused on fundamentals whilst relying on sound risk management practices. Over the last week the number of confirmed cases of COVID-19 has risen to more than 83,000 people across 50 countries.
ESG – Everyone is talking about it!
Ironically, the turning point may have been President Trump’s withdrawal from the Paris Agreement on climate change in 2017 that set the tidal wave of “doing the right thing” in motion.
Market Commentary – 19th February 2020
2019 was the year in which ESG investing joined the mainstream and became the “new normal”.
ESG in the Spotlight
Environmental, social and governance (ESG), a byword for sustainability, has in recent weeks occupied rarefied real estate on the landing page of several finance industry titans.
Q1 2020 Quarterly Perspectives
Welcome to the Q1-2020 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.
Market Commentary – 11th December 2019
The polls have become notoriously unreliable and nothing can be taken for granted ahead of Thursday’s general election.
Q4 2019 Quarterly Perspectives
Welcome to the Q4-2019 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.