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.
After a challenging year, our Equity Fund Managers reflect on 2020 and look ahead to the prospects for 2021.
Michael Bourke, Fund Manager, Global Emerging Markets
2020 has been an incredibly challenging year and we are hopeful that 2021 will be better on every level. From an emerging market equity perspective, we think there are reasons to be optimistic. The emerging markets universe is extremely diverse and offers a broad range of opportunities for selective investors. COVID-19 has had an uneven effect across the universe with certain countries, sectors and companies hit worse than others. However, as life potentially returns to normal next year, there could be attractive opportunities for contrarian investors among the stocks and sectors that have struggled most. The same might be true for the value style which has been well and truly out of favour for several years. The combination of a potential economic and corporate recovery and extreme valuation discounts for value stocks means we are looking forward to 2021 with considerable optimism.
Richard Halle, Fund Manager, European Strategic Value
Even after the recent value rebound, we continue to believe that there are attractive opportunities among unloved value stocks. The value style has underperformed dramatically in the past decade and the valuation gap between the most expensive and the cheapest stocks in the market remains extremely wide. As a result, we think there is still a long way to go to reverse this trend. We hold many cheap stocks whose prospects are being undervalued by the market and are, therefore, well positioned to participate in any further style rotation, while a focus on companies’ balance sheets should provide us with a buffer to cope with any potential headwinds.
Dan White, Fund Manager, North American Value
The vaccine news means that we can now start to price in recovery for sectors that have been hit by COVID-related shutdowns (travel and leisure, bricks and mortar retail, banks, energy – all value sectors), and for the US economy as a whole. More importantly, an economic recovery should rely less on monetary easing. It is too early to say as to the speed and nature of any economic recovery, but any sustained recovery, combined with a less dovish Fed, should lead to rising bond yields, steepening of the yield curve and a pick-up in inflation expectations – all historically favourable to the value style.
The still-wide valuation spreads and historic outperformance of value in previous cycles suggests there remains plenty of ‘runway’ for further outperformance just by price action alone, even before factoring any changes in the underlying fundamentals. However, on a cautionary note, whilst there are a number of potential catalysts (and we are very constructive about the risk-reward opportunity for selected value names), we do acknowledge there have been a number of ‘false starts’ for the style; and the events of the last year have shown that markets and economies can be incredibly unpredictable. So we continue to advocate a selective approach – one that emphasises balance sheet strength and tries to avoid structurally-challenged business models.
John Weavers, Fund Manager, North American Dividend
2020 proved to be a difficult year for dividend strategies due to the dominance of ‘new economy’ stocks in the US market. In an environment of extreme uncertainty, investors scrambled for growth with little heed for value. Companies such as Amazon.com and Facebook benefited from genuine demand growth during the lockdown periods, but these are not dividend-paying companies. The announcement of an effective vaccine in November prompted investors to contemplate a world returning to normal. The market rotation that ensued saw a strong rally in value and cyclical names at the expense of momentum. Despite the severe pressure on corporate cashflows resulting from the onset of COVID-19, we’ve continued to see dividend growth.
The short-term outlook remains uncertain and we continue to focus our attention on identifying long-term winners in a post-COVID world – including digital payments and online gaming companies – clear beneficiaries of structural growth trends.
Joe Biden’s victory in the US election is likely to lead to some significant policy changes. Climate change is high on Biden’s agenda, with renewable energy providing an obvious avenue for long-term growth. Infrastructure spending is another topical subject given its prominence in fiscal stimulus packages around the world. The desperate need to repair and modernise America’s ailing infrastructure is not up for debate. The chronic underinvestment is so widely accepted that it has been one of the few areas of common ground between the Republicans and Democrats. Investment will not be confined to traditional infrastructure such as roads and bridges; there is a political desire for universal broadband access, including the rollout of 5G networks. We have exposure to a number of companies well placed to benefit from the increased focus on renewables and infrastructure spending.
Alex Araujo, Fund Manager, Global Listed Infrastructure
The global pandemic has had unique consequences for listed infrastructure, with energy infrastructure and transport coming under severe pressure in March. These stocks rebounded strongly in April and May as governments around the world announced fiscal stimulus packages to kick-start the economy, and rallied strongly again in November as the vaccine news sparked optimism about an economic recovery. We took advantage of the indiscriminate sell-off triggered by COVID-19 to gain exposure to selected infrastructure companies with attractive long-term growth prospects. Elsewhere, the utilities sector continues to offer some of the most reliable revenue, cashflow and dividend prospects in a period of ongoing economic uncertainty.
Looking ahead, fiscal expansion in response to the global pandemic, including higher spending on infrastructure, may provide a favourable backdrop for the asset class. Our long-term approach to listed infrastructure is not reliant on fiscal expansion continuing or government initiatives having an immediate impact on economic growth, but we are also conscious that this type of dynamic can drive strong performance. Fiscal stimulus is likely to remain a topical issue until the global economy is on a firmer footing, but it is also important not to lose sight of the fact that listed infrastructure is a beneficiary of powerful trends which are likely to be more enduring. Thematic tailwinds such as renewable energy, clean transportation and digital connectivity are likely to persist for many decades to come.
John William Olsen, Fund Manager, Positive Impact
With increasing investment flows being channelled into companies that have a more holistic and responsible view of their stakeholders, but also companies that are benefiting from the landslide flow of capital towards renewables and sustainable solutions in general, I’m increasingly being asked about the prospect for ‘sustainability bubbles’.
Left behind are companies that are perceived as not contributing or contributing negatively to a sustainable future. As we look ahead, these companies face tough fundamentals and critical investors. Does that mean redirected capital is creating a ‘sustainability bubble’? Not at all. Some investors are increasingly willing to pay for non-financial quality, much like they have been willing to pay more for organic vegetables. That’s perfectly rational, but more difficult to plug into a financial model. ‘Green deals’ have been a further boost to fundamentals, and that should get priced in.
Other companies that deliver impactful products and services have not been in vogue – think campus education, micro lenders in developing countries or even healthcare companies helping to save lives. What does look ‘bubbly’ is the heightened interest in early-stage technology IPOs and EVs. Investors are increasingly willing to back loss-making or even ‘pre-revenue’ companies with eyewatering valuations, based almost solely on a belief, or hope, that the stock price will keep going up.
However, while selectivity remains crucial, we think the long-term tailwind for environmental and social solutions remains firmly in place. Governments’ efforts to place the green and health agenda at the heart of their recovery packages heightens its necessity and visibility. We expect those impact areas most disrupted by COVID-19, such as ‘work and education’ and ‘social inclusion’, will recover as economies eventually reopen. Yet, the route to recovery remains littered with uncertainty, and we will maintain our focus on quality and sustainable business models.
Rory Alexander, Fund Manager, UK Select
For the UK specifically, 2021 will be greatly influenced by the outcome of Brexit trade negotiations. Most commentators are putting the odds of deal/no-deal at a coin toss, and by the time this report gets published we may know either way. That backdrop creates a very binary outlook for our domestically-facing companies. Most have comprehensive plans in place in the event of a no deal, but we think it would be naïve to expect there won’t be some disruption. Having said that, relatively attractive valuations in the UK are discounting a lot of the risks here. Fear and uncertainty has crippled confidence in investing in both the UK market and UK assets, and any additional clarity on the future landscape should offer a good deal of upside from here.
Ben Constable-Maxwell, Head of Impact on UK PM Boris Johnson’s intention to end funding to overseas fossil fuel projects – 17/12/2020
This announcement builds on the government’s positive momentum towards next year’s crucial COP climate talks, exemplified by the UK’s recent 68% carbon emissions reduction target. The commitment to end support for overseas fossil fuel projects reflects the importance of taking a holistic approach to tackling the climate crisis and recognises our responsibility as a rich nation to support the low-carbon transition globally, rather than holding to high-carbon policies that do the opposite. As we head towards Glasgow, we need to clear the path of arcane policy roadblocks likely to hold back urgent progress. Greater ambition is still needed, but this new commitment is an important step in the right direction.
Randeep Somel, Fund Manager, Climate Solutions…on the UK government’s newly-announced ‘green’ stimulus – 18/11/2020
In today’s announcement, the UK government is seeking to stimulate the economy, go green and address regional inequality all in one plan. Governments globally have many challenges both pre and post the Covid-19 pandemic; regional inequality specifically in areas that were previous manufacturing hubs, economies in need of stimulus due to the pandemic slowdown, and also the obligation to meet internationally agreed climate goals.
The UK government is striking at the main sources of CO2 in our economies; power generation, transportation, and building efficiency. Not only will these investments help the UK in reaching its Paris Climate Deal commitments, they will provide stimulus to an economy that is still reeling from the Covid-19 pandemic. The government has specified areas of the UK for this investment that have been hit hard over the previous decades due to the dwindling manufacturing base. They have specifically targeted Wales, the Midlands, the North East and parts of Scotland – all areas that have unemployment rates higher than the national average.
The funding for nuclear energy and green hydrogen will also continue to support companies that are UK based but global leaders in these areas such as Rolls Royce (Derby) and ITM Power (Sheffield).
The UK has begun the process to address a myriad of challenges via its green industrial revolution announcement. While critics may say the £4 billion allocated so far by the government is too small, it is a strong statement of intent and one that is likely to spur private sector investment many multiples of the announced government figure.
Michael Bourke, Fund Manager, Global Emerging Markets…on post-election, US-EM relations – 10/11/2020
‘Lowering the temperature’ may be Joe Biden’s greatest differentiator with regards to future US interactions with China. We don’t expect sudden rapprochement; anti-China sentiment extends across parties in the US. However, the policy mix may differ; with greater emphasis on regional security, human rights and economic opening-up rather than trade confrontation. It’s yet to be seen if China responds by also ‘lowering the temperature’ on territorial disputes in the South China Sea, and relations with Hong Kong and Taiwan. At the margins, non-Asian emerging market countries will breathe a sigh of relief as they avoid having to choose between the US and China; ASEAN will benefit from outsourcing within Asia, particularly Indonesia and Philippines.
Biden will echo but not match Obama-era policies. The US-China relationship has deteriorated since and, while we don’t expect a complete decoupling, suspicion in bilateral relations is set to continue.
Elsewhere, one big beneficiary could be Mexico on the back of less anti-immigration rhetoric, and more regional co-operation and security – with the passing of the new-NAFTA and continued re-shoring benefits from both global multi-national companies and Chinese players into the border area.
Biden’s green agenda may also catalyse further changes in the structure and growth of electric vehicles, renewables and battery technologies, which will benefit South Korea and Taiwan, in particular.
Randeep Somel, Equities Fund Manager…on the latest coronavirus vaccine news – 09/11/2020
“Today’s Pfizer vaccine result announcement has seen an incredibly strong response from global equity markets, led by a value rally across sectors such as travel and leisure that had been hit hardest by the prospect of renewed national lockdowns. While the potential vaccine still needs to be manufactured and issued – a process that will take some time – today’s news will provide investors with some assurance that a long-term solution may be on the way, allowing them to forecast the economic outlook with greater confidence going into 2021.”
Rory Alexander, Fund Manager, UK Select…on the implications of the US Presidential vote – 05/11/2020
“Although Biden appears within touching distance of the 270 electoral college votes needed to win the White House, the likelihood of a split Congress has well and truly burst the reflationary ‘blue-wave’ bubble that the market had begun to price in over recent weeks. The hope for trillions of dollars of stimulus to be the catalyst for a pick-up in growth, inflation and potentially rates, appears dead in the water against a Republican Senate who will impede Biden’s effectiveness at every turn. This paves the way for more marginal policy changes and a continuation of the status quo, with a slightly more liberal leaning. We think that high-quality structural growth businesses will continue to thrive in this environment.’’
Dan White, Fund Manager, North American Value…on a divided Congress and the backdrop for Value – 04/11/2020
“We’ll have more clarity on the US Presidential election outcome over the coming days, but it looks like Biden will take the presidency, with the Republicans taking the Senate and Democrats the House. A divided Congress creates a lot more uncertainty this time around versus the result in 2016, where Republicans had greater control and the markets could take a stronger view on the likelihood of policy enactment. In this 2020 scenario, it’s worth emphasising the Biden policies that won’t be enacted (e.g. tax increases, increases in minimum wages), so the impact of these is no longer a big risk factor for stocks. If the above scenario comes to pass, it’s also good for healthcare, as the focus on drug pricing and meaningful healthcare reform is likely off the table.
We’re starting to see a bit of unwinding of the reflation trade (flatter yield curve, large-cap tech outperforming, mid-cap cyclicals and banks underperforming) due to the likelihood that fiscal stimulus / infrastructure spend gets scaled back with a divided Congress.
Short term, this is a headwind for ‘Value’, but the starting point and relative cheapness provides some support, and exposure to healthcare should help.’’
Randeep Somel, Equities Fund Manager – 04/11/2020 (COB)
“Early this morning it looked as if President Trump was heading towards a very narrow second-term victory, however, absentee ballots have now cast his re-election in doubt. Donald Trump has exceeded all expectations from pollsters and professional pundits but may not be quite enough to keep him in the White House. As the mail-in votes continue to be counted, it is looking as if Democratic challenger Joe Biden may have enough of a lead to sneak through a victory. It is likely to be a few days before any formal announcement is made by the states that are still counting, and even then there could be a legal challenge from either side depending on how the votes goes.
It is looking as if the US Congress will maintain its current composition, with a Democratic House and a Republican Senate. Republicans held a 53-47 majority in the chamber going into the election. There is a tight race still to be announced in North Carolina (currently held by Republicans), and a likely run-off in Georgia that the Republicans will hold – although the election will be held in January. This is likely to mean that should Joe Biden win the election, he will have to seek compromises with the Republican Senate in order to enact any legislation. This will likely provide a check on the more radical elements he may face from within his own party.
From an investment perspective, the markets have not been very volatile throughout today. They seemed satisfied to know that there is unlikely to be a ‘blue wave’ – a Democratic clean sweep of both houses of Congress and the Presidency – meaning the likelihood of large tax increases and increased regulation from the next administration is low. This could change if any of the senate seats in closely held states look as if they are in contention again as more results come through. While markets did stutter across Europe as President Trump prematurely declared himself the winner and asked for voting to stop to ensure integrity of the process, the concerns did not last long. The gold price has been marginally down all day reflecting a happy risk outlook from investors.’’
Randeep Somel, Equities Fund Manager – 04/11/2020 (9.30am)
“A second-term for President Donald Trump is looking like a possibility in what has so far been a poor showing for the pollsters, who had Joe Biden up strongly in key swing states coming into the Election. Trump has significantly outperformed expectations, managing to hold Florida and Texas and looking increasingly confident of victory in some key battlegrounds. This could change as absentee ballots are a big factor in this election which has not been the case in previous elections.
What are the reasons for Donald Trump’s outperformance? It’s telling that according to a CNN poll last night, only 20% of the electorate felt that they were worse off now than they were four years ago. The US economy remains robust despite the COVID-19 pandemic, with a combination of bipartisan fiscal support and monetary stimulus helping to smooth over the worst of the economic volatility – for now.
At this stage, a continuation of the status quo is plausible – a Trump Presidency, a Republican Senate and a Democrat House. However, absentee ballots could still favour the Democrats. This will have implications for US fiscal expansion, which would be far larger in the case of a Democrat clean sweep, given the $2 trillion stimulus package that has been on the table. However, we still expect some form of fiscal stimulus irrespective of who wins the White House, as both parties put electoral manoeuvring to one side and focus on building back the US Economy.”
John Weavers, Fund Manager, North American Dividend…initial thoughts on the US Presidential race – 04/11/2020
The presidential race remains too close to call, but the US market continues to show resilience in the face of political uncertainty. The situation remains fluid, but some initial thoughts based on developments overnight:
- The current situation feels very different to 2016. Back then, Donald Trump had a very clear policy platform. More importantly, he had control of Congress with majorities in the Senate and the House of Representatives and, therefore, control of the legislative process in US government. He could get things done. This time round, the situation is much less clear cut. Congress is likely to remain split with a Republican Senate and a Democratic House, but this is by no means certain. The lack of a convincing majority means that investment opportunities arising from the election are likely to be more limited and much more price driven than last time.
- A ‘blue wave’ has not materialised, which means that the only clarity we have is about policies that won’t be enacted, rather than the future direction of the next government.
- In policy terms, the massive economic stimulus and infrastructure spending programmes which were much anticipated under a Democratic government are unlikely to become reality for the time being. On the positive side, the tax increases necessary to pay for these initiatives are also unlikely in the short term.
- Healthcare looks like the obvious winner in the current scenario. The sector has underperformed this year, not helped by the usual political jitters, but with the legislative process on hold, it is likely that healthcare reform will be shelved for now. Pricing in the pharmaceutical industry is likely to remain unchanged and changes to government-funded healthcare provision are likely to remain on the back burner. Healthcare stocks have already moved higher at the market open, but the status quo should be positive for pharmaceutical companies and managed care organisations (MCOs).
- Defence stocks should be another beneficiary of the status quo.
- The impact on other sectors will be much more dependent on the election outcome. The trade war with China, for example, will be treated very differently by Joe Biden or Donald Trump, with different consequences for a variety of industries.
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.”