Welcome to our ‘Soundbites’ blog. The go-to hub for ‘on-the-hop’ insights from our experienced Equity investment professionals.
Please do revisit our site on a regular basis for timely updates and expert views from across the Equities investment floor.
COVID-19 update: as the economic and social implications of the coronavirus pandemic evolve, we will continue to provide targeted insights and observations direct from our investment desks to keep you informed.
Please note: this content is time-stamped; views and opinions expressed are date-dependent and reflective of conditions at the time of publishing.
Randeep Somel, Associate Portfolio Manager, on China targeting carbon neutrality by 2060 – 24/09/2020
‘’This is an incredibly strong and positive announcement from the Chinese government. It shows that China is now prepared to adopt climate policy as part of its economic plan. The main concern with achieving the Paris Climate goals has been China’s rising carbon emissions.
China has wanted to be a global leader in clean technology, and it has channelled spending to develop domestic solar and battery industries. The scale of the investments required to reach ‘carbon neutrality by 2060’ will be a big positive not only for domestic Chinese industries to grow but also for global companies that produce clean technology/sustainability products. Such a large rise in Chinese domestic R&D for areas in their infancy, such as green hydrogen, will also be a huge boost globally to help all countries hit their 2050 targets.
We should, however, not forget the timing of this announcement, we are less than six weeks away from the US Presidential election. President Trump has downplayed the risks of climate change during his term in office and signalled that the US will leave the Paris Climate treaty. His challenger, Joe Biden, is a strong proponent of the Green New Deal and has promised not only to spend $3 trillion dollars on clean investments during his first term, but also maintain the US position as a signatory to the Paris climate deal. This announcement by Chinese President Xi exposes President Trump, at a time when the US is in a protracted trade war with China.’’
Ben Constable-Maxwell, Head of Sustainable and Impact Investing, on corporate purpose – 11/09/2020
Half a century ago, on 13 September 1970, a now-infamous article penned by economist Milton Friedman was published in the New York Times. It was called ‘The Social Responsibility of Business is to Increase its Profits’. Friedman’s argument was more nuanced than the controversial title might indicate, but it set the tone (and provided academic ammunition) for the decades of shareholder primacy that followed across Anglo-Saxon markets.
This trend has recently gone into reverse, however. Today, not only do we recognise that there can be more to a company’s purpose than simply focusing on profits, but that there should be.
Research suggests that companies that serve a purpose in addition to seeking profit tend to outperform over the long term. Looking ahead, I see no reason why this trend would change. With rising societal demands, companies are increasingly expected to be responsible participants in the global economy. Companies ignoring this may find their social license to operate eventually revoked.
Investors who ignore the value of corporate purpose not only face this relative risk but could also miss out on the longer-term return opportunities that purposeful businesses can deliver. To quote academic Alex Edmans, “to reach the land of profit, follow the road of purpose”.
Carl Vine, Fund Manager, Japan Smaller Companies on Shinzo Abe resignation – 28/08/2020
Today saw the announcement that Shinzo Abe is stepping down as the Prime minister of Japan. This is several months earlier than the market was expecting. In the short-term, we anticipate much back-and-forth ‘debate’ about the implications for the economy, foreign policy and the stock market. Whilst the Japanese stock market enjoyed strong returns under Abe, his departure does not leave us unduly concerned that his work will suddenly be undone. Abe has been effective at de-politicising structural reform. He presented it as unavoidable, common sense rather than a hot political issue. Whilst some old-guard LDP factions would favour a less market-friendly stance, they appear to be in a minority. Moreover, big business and most parts of the bureaucracy has come to appreciate the observable benefits of Abe’s reform agenda. Leaving debate about who will be the next PM to the pundits, we will venture a strong inclination that corporate profits and the structural increase in return-on-capital will continue their positive direction of travel. As a thinly-veiled forecast, this last statement should, of course, be duly ignored.
Randeep Somel, Associate Portfolio Manager, on the European ‘Green Deal’ – 23/07/2020
EU leaders have agreed in principle on a €750 billion recovery fund, ‘Next Generation EU,’ aimed at helping the EU economy out of the COVID-induced recession. The ‘green’ growth strategy will include:
- A massive renovation wave of buildings and infrastructure and a more circular economy, bringing local jobs;
- Rolling out renewable energy projects, especially wind, solar and kick-starting a clean hydrogen economy in Europe;
- Cleaner transport and logistics, including the installation of one million charging points for electric vehicles and a boost for rail travel and clean mobility in cities and regions;
- Strengthening the Just Transition Fund to support re-skilling; helping businesses create new economic opportunities.
The program will be financed by issuing joint borrowing at the EU level for the first time. Newly-issued EU debt will be repaid by 2058 through the EU budget, including through new taxes introduced at the EU level. A total 30% of the overall spending will be earmarked for green investment and fighting climate change. As well as agreeing the recovery package, the EU has also put the framework in place for its budget up to 2027. This will be €1 trillion in spending and constitute the largest green stimulus package in history. All expenditure must be consistent with the UN’s Paris Agreement goals of cutting greenhouse gases, where possible. Longer term, both the recovery plan and the long-term budget will be very supportive of European companies focused on sustainability; specifically climate change.
For more details on the program and what it means for specific sectors, please read our related blog article: The EU goes green: who wins?
Rory Alexander, UK Equities Fund Manager – 29/05/2020
‘’Within the Covid-19-induced market volatility there has been an obvious flight to quality. ‘Value’ stocks, often characterised by low returns on invested capital, high leverage and structural headwinds to growth, have been punished. It’s in testing times like these that the vulnerabilities of lower-quality businesses are exposed.
On the other hand, amidst the turmoil, many well capitalised and high-quality companies will have used the pandemic to invest and extend their competitive position. As the Coronavirus fog clears, we believe those companies will have sown the seeds for material value creation over the long term. The indiscriminate fall in share prices during March and April provided a ‘once in a decade’ opportunity to enhance portfolios with a handful of such investments.
Looking forwards, we often talk about the ‘3Ds’ of debt, digitisation and demographics as perpetual headwinds for global growth, inflation and interest rates. The enormous corporate and sovereign debt accumulation required to support economies during the pandemic is only going to accentuate those forces. With this backdrop in mind, we believe high-quality sustainable growth companies are best placed to outperform the wider market over the long term.’’
Michael Rae, Global Energy Analyst on the oil market – 26/05/2020
‘’Countries which have had a successful lockdown and healthcare system response are seeing a rapid recovery in fuel demand. Routing requests on traffic apps in Germany, for example, have reached pre-crisis levels. It is interesting to note that Public Transport use is lagging, apparently as people prefer to use their cars to minimize contact with others. Road travel in the US has also recovered sharply, although countries like the UK, Italy and France have had a deeper trough and are still lagging. An historic supply side response, through production cuts from OPEC+ and the likes of Norway, is also having a positive effect on the crude oil market, but the pace of demand recovery has been a positive surprise, driving a stead rally in crude oil prices from the trough levels of April. Further falls in oil prices cannot be ruled out but it is interesting to note that US inventories – the best real-time indicator of global crude balances – have drawn in each of the past two weeks. This suggests that the threat of reaching global ‘tank tops’ has diminished and, for the oil market at least, April was the cruelest month.’’
Michael Stiasny, Head of UK Equities and UK Income Fund Manager – 26/05/2020
“We are clearly in an environment of extreme uncertainty and there are many short and medium term pressures on income. However, we continue to believe that longer term the attractions of income investing will remain. In particular, we see no reason why the higher yield equity approach should lose its benefits either. It may be that the UK market as an entity has a lower yield going forwards against its yield in the recent past, but we still believe that investing in a carefully constructed and managed fund that has a premium yield to the UK index, will likely deliver long-term outperformance versus the UK index, and a healthy level of income in each period.”
Dan White, Fund Manager, North American Value – 07/05/2020
“The Value style of investing has been put under pressure again since the sell-off induced by COVID-19 concerns, but this has been hugely exacerbated by the dramatic drop in oil prices. US shale producers have been hit the hardest, with greater exposure to WTI prices. Large cap producers with integrated business models that are not entirely dependent on oil will be relatively resilient going forward, along with some businesses that support the industry, such as oil tanker businesses that can benefit from the recent oil storage shortage. In the current environment, balance-sheet strength is particularly important to provide a buffer to help weather the storm. While the short-term price movements are unpredictable, we believe the long-term price will be driven by the marginal cost of supply. Even as we transition to greener and less carbon intensive forms of energy, the world still needs oil. The indiscriminate selling in the sector has provided a great opportunity to pick up some quality names that will come out of this environment in a stronger competitive position; a great example of how active managers can add value, by being selective in their investments in an unloved sector that still has an important role in the global economy.”
John William Olsen, Fund Manager, Positive Impact – 30/04/2020
‘’It’s impossible to outsmart the market in terms of predicting the virus trajectory. Even the duration of the downturn or the strength of the inevitable recovery is highly uncertain and, unless you’re trying to time the market, I don’t believe it deserves the overwhelming attention it is currently getting from many market participants.
Managing a long-term, concentrated and fully-invested equity portfolio is a different endeavor altogether. It is about trying to find relative value in the market, about finding stocks that offer long-term value at the lowest possible risk. During periods like this we can either choose to do nothing, which is sometimes a wise move, or aim to make an exchange – selling a stock that has become too expensive or where we have over-appreciated the strength of the business model, and replacing it with a quality, sustainable company that is being offered at a relative discount because of short-term concerns. Predicting that such a franchise will, at some point, return to business as usual seems less of a herculean task.
Some companies will leave this crisis weakened, some will experience business as usual and yet others will come out with a strengthened competitive position, but it’s important to remind ourselves that the value and durability of a franchise is not determined by how many “extra cans of soups” it will sell this year or whether earnings will have fully recovered in 2021 or 2022.’’
Randeep Somel, Associate Portfolio Manager, on oil price volatility – 22/04/2020
‘’In the history of the oil market, the 20 April 2020 will be a notable day. While we have become familiar with a volatile oil price, we have now seen the sharpest single-day decline that has led to oil contracts trading at negative values for the first time. The consistent increase in the oil supply since the advent of hydraulic fracturing (‘fracking’) has meant supply has been running ahead of demand for some time. The big producers, notably OPEC (and latterly OPEC+) have had many attempts to curtail production, but their attempts have not been successful. The sheer drop in demand due to the economic impact of COVID-19 is unprecedented. Never in the history of the oil market has demand come to a halt as we are currently seeing.
While no production can be economically feasible at such low oil prices, it is not so easy simply to switch off production from large oil wells. Shutdowns performed in a safe and sustainable manner take time. So far only West Texas Intermediate (WTI), the North American oil market has had such a large surplus that the WTI price hit negative $40 at one point on Monday. The crude oil that is being produced needs to find a home and there are only so many storage facilities. As these facilities continue to fill up, the oil must be shipped further and further afield, and the buyers want compensation for that. European Brent is hovering around $20 per barrel, the abundance of supply is not as acute, but as the economies remain on partial shutdown and North American oil continues to look for a new home, expect European prices to remain pressured. Production should continue to fall at these price levels and the excess supply should eventually clear, but we need economic activity to pick up again to see a more stable oil price.
The reaction in the oil majors has not been very extreme, the assumption being that oil prices cannot remain this low for long without the market clearing. A low oil price is good for consumers, those that still need to purchase oil. It also benefits oil-importing countries, as a large input cost of the economy has reduced so dramatically. The airline industry, which would normally be very strong with such a low oil price, is unfortunately unable to take advantage of the current situation.’’
Alex Araujo, Fund Manager, Global Listed Infrastructure – 22/04/2020
‘’As governments, healthcare agencies, companies and households continue to deal with the fallout from the coronavirus outbreak, investors have been grappling with the ensuing market volatility. Utilities have not been immune to this, but have been relatively sheltered from the global health crisis. Utility companies tend to benefit from greater stability during periods of uncertainty; providing life’s essentials in the form of basic services such as electricity, gas and water. As such, they are able to offer reliable revenues and cashflows through economic turmoil. The importance of digital infrastructure has also been reinforced by the current circumstances as ‘stay at home’ policies have required us to connect with family, friends and work colleagues through digital means. By contrast, areas such as transportation infrastructure have been under greater pressure; as travel restrictions have disrupted traffic around the world, impacting airports, toll roads and rail networks globally.
The market volatility has created some extreme pricing dislocations, and we have acted on our conviction to take advantage of these buying opportunities, investing in some high-quality businesses that are able to grow their cashflows and dividend streams over the very long term.
Despite the immediate uncertainty, we are keen not to get overly bogged down in the short-term volatility, and remember what we are trying to accomplish – delivering stable, long-term income streams for our clients by investing in long-life, physically-backed, asset-rich businesses that are well-placed to capitalise on some very important longer-term structural themes.’’
John Weavers, Fund Manager, North American Dividend – 17/04/2020
‘’We are mindful of the fact we find ourselves in an environment where dividend cuts are becoming more prevalent. It is important, therefore, that we understand which companies are most under threat from the economic impact of the pandemic.
Certain industries have seen an almost total cessation of operations. We have already seen high-profile casualties suspend their dividends; particularly within the travel and auto industries, and among retailers. Even areas that have continued to operate are facing severe cyclical pressures. We feel our focus on long term, sustainable businesses, with stable cashflows and robust balance sheet strength, places us in good stead.
The US banking industry is an obvious area where dividends may come under political scrutiny, in line with other parts of the world. Here, we invest in companies at the quality end of the spectrum, again with strong balance sheets, that are better able to defend their dividends. Nevertheless, we remain highly vigilant about the potential for dividend cuts in this difficult climate.’’
Jasmeet Chadha, Global Technology Analyst – 14/04/2020
“Consumers have stopped spending on travel/ eating out almost entirely. Discretionary spending is likely to be down 35-40% year-on-year. Staple spending is resilient as seen in groceries up 5-10% year-on-year, reflecting stocking, and less going out.”
Michael Bourke, Fund Manager, Global Emerging Markets – 09/04/2020
“Not all emerging markets are created equal. This sell off has led to huge dispersion across countries and regions. Asia, led by China, has outperformed through this period benefitting from its economic and market compositions. EMEA and Latin America have been far weaker, reflective of the strength of many countries’ economies going into this crisis and exacerbated by commodity exposure and current account deficits. As a consequence of this outperformance, and the (partial) inclusion of China A-shares, Asia now accounts for almost 80% of the Global Emerging Markets Index. This level of performance dispersion is witnessed across, and within, all markets which creates a lot of opportunities for active, long-term investors. While we expect a degree of ongoing volatility through these uncertain times, valuations are at, or below, previous crisis lows and we see material upside on a longer-term view.’’
Randeep Somel, Associate Portfolio Manager, on China’s stimulus plan – 08/04/2020
“The timing of the Coronavirus mass outbreak in China coincided with Chinese new year; when the economy was scheduled to slow, companies had stockpiled, and people were no longer commuting to/from work, but at home. This allowed the Chinese authorities to gain control of the situation much more quickly, by keeping the economy closed for a further two weeks while they dealt with the outbreak. This looks to have limited the financial disruption to the economy for now.
China’s response to the Coronavirus epidemic has fallen well short of the 4 trillion yuan (US$564 billion) that the government announced in response to the Global Financial Crises in 2008. Having got the situation under control, China’s response so far has been to help solve problems occurring in the resumption of production. The government has, so far, cut interest rates and put through increases for the Federal government’s budget deficit ratio to issue more local bonds, along with a special treasury bond to help the economy. Beijing has opted to prop up businesses to ensure jobs are maintained and the economy keeps moving. This is different to the actions taken in the US or Europe, where governments are providing direct support to individuals and businesses through much more far-reaching stimulus plans.
The Chinese government’s approach can be read as cautious, as they want to maintain price stability and have concerns on accumulating too much debt. If the global economy continues to slow, China will not be immune. However, the People’s Bank of China maintains that it has scope to adjust its policy stance and wants to avoid “using all of its bullets at once”. China’s policy actions, so far, show it is stabilising the domestic economy rather than stimulating it; authorities are waiting to see if other countries are successful at stabilising their own economies.”
Mark Wilson, Global Industrials Analyst, on the impact of COVID-19 and potential pockets of value – 08/04/2020
“We’re encouraged that manufacturing lead indicators are holding up better than in the service industry, and that factories in China appear to be getting back to work fairly quickly, but however quickly the broader economy gets back to work, demand in some industrial subsectors like aerospace equipment will take more time to recover from longer lasting damage, both in terms of end user demand and the strength of balance sheets at both manufacturer and customer. The human aspect of this crisis and the nature of the enforced shutdown also means that some areas typically viewed as safe havens in industrials – aftermarket & servicing for example – may be more severely impacted than in a typical recession. That all said, there are pockets of value emerging – end markets like trucking, automation, mining and perhaps construction, where the outlook appears more encouraging or where weakness could prove short-lived and, as always, companies with credible self-help angles to the investment story.”
Dan White, Fund Manager, North American Value – 07/04/2020
“Balance-sheet strength will be key for companies and industries navigating the fallout from COVID-19 in the coming weeks, months and, potentially, years. By maintaining a robust portfolio which trades below the wider index, and with a significantly stronger balance sheet, active managers can shield investors from the greater downside risk (the potential for permanent loss of capital) associated with weaker, highly-levered companies.’’
Carl Vine, Fund Manager, Japan Smaller Companies – 07/04/2020
’‘Whilst the medical aspect of this crisis has many uncertainties, unusually, the clearly defined nature of the economic demand shock gives governments a head-start in formulating policy. Indeed, an enormous and co-ordinated fiscal response is already in the offing. The recent panic in markets, especially in Japan, has resulted in indiscriminate selling. In some cases, high-quality leading business franchises have sold off significantly more than the market, providing opportunities for risk/reward rebalancing.’’
Michael Rae, Global Energy Analyst, on oil-price volatility – 07/04/2020
“As Brent crude continues to rally, there is (justifiably) widespread market scepticism about the ability of OPEC+ to orchestrate a large enough production cut to rebalance the crude oil market, given the unprecedented demand disruption we are facing. This demand-led imbalance cannot be resolved purely through production cuts. However, the conditions are coming together for a crude oil price recovery.
Any successful deal to come out of the next OPEC+ meeting, scheduled for this Thursday, will rely on the actions of the three largest producers: Saudi Arabia, Russia and the US. The greatest uncertainty, and largest influencing factor, is the behaviour of the US. It is not clear how the Trump administration would mete out production cuts to the US industry, which is very fragmented and subject to anti-trust law and the demands of shareholders and creditors, but there is precedent in the 1970s when cuts were co-ordinated through the Texas Railroad Commission which regulates oil production in the State. The fall in the US rig count has already triggered a likely production decline of 1.5-2mnbbl/d over the next year, so it may be that we simply see this codified as a ‘production cut’ in some kind of Grand Pact between the US, Saudi and Russia.
It was the line of sight to inventory builds slowing which triggered the oil price recovery in 2016, and became a two-year rally from $25/bbl to $85/bbl. We are certainly not set for a meaningfully higher oil prices any time soon, but based on the available information, I think we can tentatively say we are past the low for Brent for this down-cycle.”