Your Portfolio: Brexit, Covid & What Comes Next?
9 December 2020
To all Financial Friends
Light at the end of the tunnel is the phrase we hear more and more today. The first anti-virus vaccine arrives in the UK! During November, in anticipation of the vaccine arriving, we saw the FTSE 100 Index rise by more than 12%! Even today, 9th December, the Index continues to rise.
Investors are clinging on to the hope of some kind of last-minute Brexit deal as well as comments that the vaccine will bring us back to ‘normal’ by late Spring 2021. Such hopes are enough to support the equity market.
Join me for a cup of coffee and a catch-up chat at the end of this commentary to see my conclusions. If you prefer, arrange a 15-minute Zoom booking to talk the opportunities through.
The Big Divide
November saw the divide between the performance of bull and bear holdings. As vaccine news looked more promising so (the bulls) holding equities saw profits arising. As we have learnt, there are two main asset types in the market. The first are fixed Interest holdings (Gilts, Index Linked Gilts and corporate bonds) The second asset, considered riskier, are holdings of equities/shares. Equities cover a broad sweep from large company shares (FTSE 100) to smaller companies then to global holdings across the USA, Europe, Japan, China, India and then smaller economies (less established emerging markets).
Students Actual Results
Charts of actual performance achieved by students typically show equity funds rising by up to +12.55% over the month of November alone. Holders of bearish funds with bonds and gilts saw falls over the one month of around -1.8%. This is the market working through negative correlation where one asset type rises as the other falls. All very normal.
In the recent past, holders of gilts and bonds saw gains of 4% over 4 weekly periods. Profits could have been (and in some cases were) taken at these points storing cash for future opportunistic purchase at lower prices. As I add these words, fears of a ‘no deal’ Brexit are driving investors back from equities to fixed interest holdings driving prices up.
In these unusually volatile times, even students new to investing, during the past 6 months, have seen returns of between 8% to 12% across 4-week to 6-week periods.
Time to Take Profits?
For our bullish students might it be a time to take profits and store in cash again for future market downward corrections to occur, giving opportunity to buy back at lower prices? Investors may however consider that things (given the vaccine promises) are on the way up and the future looks bright for an ongoing rising equity market? Taking profits and storing in cash as the market rises provides a defensive technique against future equity negative economic events.
Infrastructure
Two steps ahead of the market?
One equity asset class we have mentioned in the past are funds invested in infrastructure. Returns in these funds broadly achieved around 4% during the one month of November. Your ears may have pricked up, hearing Johnson and Co announcing large sums of money to be ploughed into infrastructure. This to support growth of employment. Are infrastructure funds worth further thought perhaps? Some students are already invested at previously lower prices looking two steps ahead of the market.
Current news points to commodities being in demand and rising in price. This could prove another stimulus for infrastructure funds as iron ore, copper and other metals and oil rise in price, suggesting investors ae looking forward to a better global economy.
Governments around the globe have signalled their intention to drive a recovery through investment in infrastructure. Such intentions have already been causing the materials mentioned here to rise in value anticipation of demand increasing.
Funds invested in infrastructure have underperformed other equity classes and so have been disappointing to date. In our comments and in the Money Awareness Course, using the ‘two steps ahead’ principle, we have highlighted Infrastructure as an opportunity. If you acted on this, perhaps the good times are yet to come as others catch on?
What is Different Now?
Covid
The first vaccine has arrived! Very positive news! Equities have risen in value in response. Surely this will help bring us back to normal? That said, on arrival of the first vaccines in the UK we hear the initial supply will be less than first thought. Pzier have needed to reject some of their supply due to safety reasons. We can expect hiccups and some uncertainties along the way.
One professor on the news today has said we can expect to maintain social distancing for many months to come. As the vaccine is rolled out we can expect uncertainties while we fully expect to ‘get there’ in the end, and surely we will!
Uncertainty causes volatility in the market with swings away from equities to fixed interest on bad news and swings from fixed interest to equities on good news. Expect volatility and use the profit taking route along the way if you choose to be defensive or opportunist.
The Global Economy in Intensive Care!
Confidence can increase for a positive outlook for equities, though probably only whilst authorities remain able to continue intensive care by supporting the global economy with ongoing stimulus (pegging down interest rates and quantitative easing) and borrowing mythical amounts of money at low interest rates to prop up the full capitalist system.
At some point in time the stimulus has to stop, and we may be close to that cliff edge even now. When the stimulus stops, equities may well fall steeply (unless other supportive significant market elements unexpectedly arise). When this occurs (as it will) Gilts and quality Corporate Bonds holding ‘A’ rated stocks should rise along with gold.
We should not forget that the global economy before Covid arrived, was said to be ‘teetering on the brink’ of collapse. Now, add the huge fall in Covid inspired Gross Domestic Product (GDP) across the globe, rocketing unemployment, as household names go to the wall and massive debt across the nations of the world and then, still, the usual background issues and you might be left wondering?
Brexit
As I write, negotiations are close to breaking point leading to a ‘no deal’ probability. That said, both parties have too much to lose so the expectation is that some sort of deal will come about. We won’t go fishing around for solutions to the level playing field issue, but we will not want to be under the thumb of the EU either, so the issue of governance may well be the sticking point.
Whichever way it goes, uncertainty for the markets will be the result. That being so we will have volatile markets ongoing giving us the profit taking and storing opportunities we have been used to in recent months.
A ‘no deal’ is likely to depress UK equities, more so in the shape of the FTSE 250 companies than the FTSE 100 (which, although domiciled in the UK have global asset holdings). If Your portfolio is diversified across the globe then Brexit may not have too much impact. If sterling falls then your global holdings should benefit through a currency gain.
Global Warming
Covid news has somewhat drowned out the growing belief that global warming is a more threatening concern than the virus. During the Money Awareness Course and looking ahead, we highlighted the value of going green in your fund choices. Reports show that investors are piling in to ESG (Ethical, Sustainable, Governance) funds, so if you bought ahead that is good news potentially. Even better, research shows ethical funds are outstripping in performance, against non-ethical funds.
Just to Mention
Other factors in the background, which will prove to become important, are the replacement of Donald Trump (probably!) by Joe Bidden as President of the USA. Until the new regime shows its hand, markets may become unsettled and my guess is that economic stimulation will slow down.
The relationship between the USA and China remains unresolved. The battle of tariffs between these economic giants is key to the outlook for the global economy.
Here in the UK there is growing lack of confidence in the handling of the pandemic by the government. Additionally, there feels to be growing worries over the public’s acceptance of the safety of the vaccine. Of course, there are also the conspiracy theories which do not help. Failure to accept the vaccine in sufficient quantities could prolong the economic uncertainties further.
My network of industry connections (stockbrokers, economists) are flagging up their concern of a sudden ‘out of the blue’ rapid rise in inflation and interest rates. A ‘no deal’ Brexit is likely to inspire this likelihood. In the Money Awareness Course, a good while back, we considered inflation risk on a ‘two steps ahead’ basis looking at a holding of Index Linked Gilts as a potential benefit if this risk develops.
What next?
PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
