Since the Market Low

John Leiper – Chief Investment Officer – 2nd November 2020

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.

Relative gains stemmed from our ongoing preference for emerging markets, particularly China which is now leading the global economic recovery. Based on the latest GDP numbers, the world’s second largest economy grew 4.9% in Q3, compared to the same quarter last year. Purchasing managers’ indices, which are economic indicators derived from monthly surveys of private sector companies, are also very positive for China. This morning’s manufacturing PMI came in at 53.6 which was ahead of consensus and the prior reading at 53. Meanwhile the service sector posted its strongest performance since 2013. As a result, our allocation to local currency Chinese government bonds and equities have performed particularly well, notably our position in China-based internet companies which rose 5.4% during the month. Within developed market equities the standout performer came from our ESG bucket and allocation to the global clean energy sector, which also returned 5.4% (in USD) despite the broader market falling approximately -3%. Within fixed income our position in long-dated European government bonds also paid-off, returning more than 2% whilst long-dated US Treasuries (which we dislike) fell almost -3%. Finally, our commodity carve-out continues to act as a ballast against ongoing market volatility, with positive returns on copper balanced against negative returns from silver and gold, which nonetheless outperformed most developed market equities.  

However, what is particularly noteworthy is how the funds have performed since the market low, in mid-March. The chart below shows the 5-year performance of the MSCI World equity index. In mid-February, the virus transitioned from a Chinese phenomenon to a global pandemic, ushering in the first wave of lockdowns and steep drawdowns across risk assets. Then, on the 23rd March, equities staged a remarkable recovery, spurred-on by the impressive and co-ordinated policy response from governments and central banks across the world. Following last week’s sell-off the index sits just below its closing level for 2019.

From the 23rd March to the 31st October 2020, ACUMEN Portfolios 3-8 all sit within the first quartile IA sector ranking, with ACUMEN Portfolios 3, 4 and 5 making a top 10 appearance and 6 and 8 just missing-out, ranked 11/140 and 16/135 respectively. It’s unfortunate that the ACUMEN Income Portfolio has lagged slightly but worth mentioning this is a dividend paying strategy which has understandably underperformed non-income strategies due to dividend cuts, a consequence of COVID-19.

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The main event this week is the US election on Tuesday. Whilst Democratic nominee, Joe Biden, leads in the national polls, we believe the electoral college result will be a far closer contest. Based on certain assumptions concerning voter turnout, Trump is projected to win several key battleground states. Add in the Federal Reserve policy meeting on Thursday and a key US labour market report on Friday, against a deteriorating COVID-19 situation, then you have all the ingredients for a sharp rise in volatility. The ACUMEN Portfolios are positioned for this via our preference for quality anti-fragile assets.

In the UK, a dramatic U-turn from Boris Johnson will see the country enter nationwide lockdown later this week, raising fears of a double-dip recession. Last week the IMF updated its growth forecasts for the UK economy, from -9.6% to -10.4% in 2020, which, if realised, would be the worst economic contraction in 300 years. With Brexit negotiations ongoing, rising unemployment and weak inflationary outlook we could see a bold move from the Bank of England when they announce their latest policy decision on Thursday. This will likely include increased QE bond purchases, of 150-200 billion GBP, which could weaken the UK pound, although the focus will be on any updated communication around negative interest rate policy.

Whilst the election will dominate market movements this week, a weaker pound is consistent with the chart below which shows the correlation between GBP/USD and Google’s COVID-19 Community Mobility Report which tracks movement trends over time by different categories such as retail and recreation, groceries and pharmacies, parks, transit stations, workplaces and residential. The first nationwide lockdown, which began on the 16th March, saw a notable decline in this index, and corresponding fall in the currency. If lockdown mark 2 is similar then the currency may come under pressure, particularly over the next two weeks. Beyond that, we are mindful of the positive catalyst from an eventual deal on Brexit which could be achieved by mid-November, as evidenced by recent signs of progress on fishing rights.

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This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.  

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