Friday, 27th of November 2020
“We have two classes of forecasters: those who don’t know and those who don’t know they don’t know.”
– John Kenneth Galbraith
________________________________________
Equities continued to run-up this week, as investor sentiment turned increasingly bullish despite rising coronavirus case numbers in the US and harsh lockdowns remaining in place across much of Europe. ‘Normalisation’ is the new trade on the block as investors tilt their portfolios back into value. The initial trigger for this sector/factor rotation was Pfizer announcing that it had discovered the first highly effective coronavirus vaccine on 9th November, shortly after the US Presidential election went Biden’s way. Since then two more vaccines have been announced on consecutive Mondays: one from US biotech company Moderna, and another from UK pharmaceutical giant AstraZeneca (working in partnership with Oxford University). Stage III trial results for AstraZeneca’s vaccine (which were released this week) revealed that it is up to 90% effective against covid-19. This is again very impressive. However, there are other important positives for AstraZeneca’s vaccine offering. Firstly, it is cheaper than Pfizer’s or Moderna’s vaccines; and, secondly, it need not be kept in a deep freezer to remain potent. This should make the AstraZeneca vaccine much more attractive for EM countries that would struggle to distribute the other two vaccines quickly. In the war against the coronavirus, mankind appears to be winning.
Despite the Thanksgiving trading hiatus yesterday, the S&P 500 Index is up +2.0% for the week ahead of the Friday open, while the DJIA pushed through 30,000 for the first time ever on Tuesday after Trump finally allowed cooperation between his government and the incoming Biden Administration. In a break with the pattern in recent weeks, the S&P 500 has significantly outperformed the pan-European STOXX 600 Index this week, with the latter up just +0.5% as of this morning. Notwithstanding this fact, however, movements within US equities betray the same trend that has dominated markets since the start of the month; namely, of cyclical, small-cap, and value stocks beating those defensive, mega-cap, and growth stocks that proved themselves to be so resilient through the pandemic months. Markets now have their eyes firmly on the future, and they are looking through the next few months of economic hardship to what lies ahead when life (hopefully) returns to normal next summer. While uncertainty reigned supreme earlier in the year, a glut of liquidity created by central bank intervention had to flow somewhere; and it coursed into those stocks that seemed to be (at worst) unaffected by the pandemic – if not actually to have benefited from the growth of the stay-at-home economy. However, from early August, and as the market began to narrow dangerously, we warned that the left-behind sectors would soon come roaring back. And those investors who took our advice or held their nerve (and kept their positions) when things seemed to be so perilous in the spring and summer are now being rewarded. Of course, an element of caution is advised. Markets do not experience unbroken rallies; periods of consolidation are inevitable (and if bitcoin is something of a leading indicator one could come soon!). What is more the coronavirus recession is only just beginning, and the fiscal fallout from the pandemic will be on a scale unseen since WWII. This is simple fact. However, the outlook for equities is undoubtedly fast improving. And missing the recovery is the biggest risk for those of us looking to allocate capital today.
Looking ahead, we feel that UK equities could be an interesting way to play both the economic reflation, and the rising probability of a Brexit deal being reached before the end of the year. Relative to developed market peers, UK stocks (and sterling) have been cheap on most metrics since the 2016 referendum. (Indeed, the UK is now at its cheapest level vs. the US since the 1970s!) This Brexit risk premium could close quickly in the event of a deal, in our view. And, as things stand, negotiators look likely to reach one soon – particularly since Dominic Cummings and other hard-line advisors were allowed (or rather forced) to resign from the UK government earlier in the month. The theatrics of the final phase of Brexit talks have convinced parts of the media that a deal is undoable (and we are not naïve to the possibility of ‘no deal’). But after such a long and drawn-out process, failing to reach an agreement would be a huge embarrassment for both sides. If there is one thing that every politician holds in high esteem (other than themselves), it is their political legacy. And, together with the benefits of having some kind of deal over none, we feel that that this should be motivation enough when EU and UK leaders get together in London next week. From the pandemic, meanwhile, UK equities have also suffered significantly, and the FTSE 100 and FTSE 250 are still well below their pre-crisis levels. We feel that the positive vaccine news therefore has the potential to really turbocharge UK stocks as the recovery beds in. What is more, UK indexes are more cyclical/value biased than many others in Europe and the US, not least because of the UK’s huge financial services industry. As discussed above, value sectors have underperformed hugely this year. But the early stage of a recovery is the best time to invest in them – and there is no reason to believe ‘this time is different’. We would therefore recommend that you look again at the UK, and for ways to play the Brexit/Vaccine bounce.
Another area of the equity market where we see substantial promise today is the precious metals mining sector. As discussed many times in these pages, we have a positive long-term view on precious metals given ultra-low interest rates globally (nominal and real), huge M2 money supply growth in the US and Europe, ongoing geopolitical uncertainty in the Middle East, Asia, and Europe, and the growing threat of currency debasement given negative debt dynamics the world over. We would now add to this list the potential for a weaker (or at least not materially stronger) dollar under Biden. However, we feel that investing in gold and silver equities could be a particularly interesting way to play the precious metals theme – if investors can stomach the volatility! Gold miners in particular are still languishing below the level they reached in 2011, despite gold touching new highs in the intervening period. Moreover, since 2011, the mining companies themselves have improved their capital discipline, shored up their balance sheets, and begun to pursue a more selective approach to M&A. These positive developments have primed the industry for strong future performance in our view, and with the sector having suffered selling pressure this month, now could be an interesting entry point for those who want to bring some shine to their portfolio.
In April's news roundup, we look at some of the key movements and purchases including the return of US investment into the London real estate market to a ten-year high of £2 billion in Q1 2024. We also highlight some recent institutional office acquisitions in London.
In this article Neil Benjelloun, Bedrock’s Head of Private Markets, sheds some light on the growth of VC-funded purpose-driven businesses in solving the world's most pressing challenges. Sharing key insights and takeaways from a live Q&A session he hosted with Cameron McLain, Co-Founder and Managing Partner of Giant Ventures.
It is common to see members of the next generation in their 30s occupy a seat on the board of directors. This is desirable as it’s a very important interaction point with the business or the family’s assets, where they learn about strategy and create the family’s vision for the future. But as with most things, there is a good and a bad way to go about it. In this article, Maria Villax, Head of Family Strategy & Governance at Bedrock explores how next gens can prepare for a seat on the board.