By David Absolon, Investment Director at Heartwood Investment Management
Despite the US presidential election outcome, we believe that the fundamentals of the global economy are improving modestly. In particular, we have been encouraged by better survey data across developed economies, as well as further tightening of labour markets. Meanwhile, the inflation picture is shifting. As disinflationary pressures ease with the recovery of commodity prices, this is challenging the ‘lower for longer’ environment, which is further reinforced by a more balanced tone from central banks.
Clearly, we have entered a new political paradigm and a President-elect Trump administration offers both opportunities and risks. Our portfolios were not positioned for a specific Trump or Clinton outcome, rather we saw the US election as a sequence of risk events. While we are likely to see volatility in markets with the ebb and flow of political noise over coming weeks, we have been reassured by the generally sanguine response of developed equity markets. We will wait to see how events unfold over the coming weeks as we learn more about the new administration, suffice to say that a shifting political and economic landscape implies a looser fiscal stance, culminating in the baton now seemingly being passed away from extraordinary monetary policy towards fiscal stimulus, tighter monetary conditions and rising price pressures.
Over recent months, we have been tilting our portfolios towards a value bias and this journey is likely to continue. Already we are seeing more performance dispersion between asset classes and sectors, with emerging market assets and currencies notably underperforming, as markets adjust to a reflationary backdrop and threats of protectionism. We expect a Trump presidency to have a meaningful impact on certain sectors such as infrastructure, industrials, defensives and energy. In consequence, we have addressed our US equity underweight exposure and rotated a modest allocation out of the S&P 500 into the industrials sector and smaller US companies, which are likely to benefit from the perception of more growth-friendly policies. With the economic environment seemingly less supportive for bond markets, we are maintaining our short duration position. We believe further financial market volatility is likely, but also that investors need to reassess the probability of a more positive economic backdrop, and whether that holds out the prospect of higher valuations for real assets. For now we remain slightly overweight equity, short duration in bonds, and underweight in commodities and property.
October was a tougher month, though sterling weakness flattered overseas equity returns. While economic data and results season were broadly positive, investors were more focused on geopolitical events and the pending US Presidential election. During the month, we modestly raised our US equity allocation into targeted exposures in industrials and smaller US companies, which are expected to benefit from a President-elect Trump’s pro-growth stance. Elsewhere, we are maintaining our overweight position in European equities. This market has not been favoured by investors, but it offers a relative value opportunity versus other regions. For similar reasons we are also maintaining our overweight position in Japanese equities, which should also benefit from a more shareholder-friendly approach among Japanese corporates. Within UK equities, we remain focused on large-cap value exporters, although domestically-focused smaller companies could provide opportunities over the medium-term as we see more visibility around Brexit and a more stable currency. We are modestly overweight in emerging market equities. While there are questions around US protectionism, we continue to believe this asset class will benefit from improving growth prospects, policy easing and ongoing liquidity flows.
The trend of steeper yield curves (longer-dated bonds rising more than shorter-dated bonds) has been in place over the past month, but it has been particularly reinforced by the US election outcome. Markets are re-pricing to reflect potentially higher levels of growth, debt, inflation and interest rates. We are maintaining our long-standing short duration position to reflect gradual reflation and the shifting bias of some central banks towards a neutral policy stance. If yields rise to a meaningful degree, we may take the opportunity to extend duration as our shorter-dated bonds mature. We have also trimmed our US High Yield energy position following strong performance. We are maintaining our modest allocation to emerging market sovereign debt (hard currency), given our expectations that the asset class should benefit from cyclical and structural economic improvements.
UK commercial property continued to fall in October as investors continue to assess the impact of Brexit. There are, however, a few signs that confidence is recovering. Investment picked up in September, including demand for Central London and regional offices, with sterling weakness attracting overseas investors back into the market. We maintain our underweight allocation to this asset class, having reduced exposure earlier in the year. We maintain exposure to regional offices and industrials, which are expected to benefit from rising rental income growth due to supply constraints and low vacancy rates. We have also broadened our exposure outside of London to other key UK cities.
Oil prices have seen more price fluctuations of late, responding to speculation around the OPEC meeting at the end of November and whether production cuts will be agreed. Evidence suggests a tightening in supply while demand remains strong, providing modest support to the oil price in the near term. Industrial metals fundamentals have also improved over recent months on supply constraints. Overall demand remains sluggish, but sentiment towards the sector could improve on Chinese data improvements and if we were to see meaningful fiscal stimulus. Our view remains constructive on precious metals, which we continue to view as a portfolio diversifier, although short-term performance closely follows the perceived course of global monetary policy. Agricultural commodities have bounced recently, but are still at multi-year lows; our long-term view remains positive.
We have a limited allocation to hedge funds, with select exposures to macro/CTA strategies with a proven track record. We have also been allocating a small amount of capital to the Heartwood Alternatives Fund, a dedicated managed portfolio of alternative investments. This vehicle provides access to a wider opportunity-set that would otherwise be unavailable due to regulatory and operational constraints.
We have built up sizeable liquidity across our portfolios both in cash and short-dated bonds, which we are ready to invest if we see opportunities.
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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