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MITON’S DAVID JANE: CLIMBING THE WALL OF WORRY

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MITON’S DAVID JANE: CLIMBING THE WALL OF WORRY
  • The current bull market could last longer than investors expect
  • Markets are becoming less dependent on central banks
  • Repeated market collapses are the exception, not the norm 

David Jane, manager of Miton’s multi-asset fund range, comments:

“It’s a popular pastime among market commentators to worry about the downside. However, little is written about the risk of not participating in market rises and yet that, for long-term investors, is equally important. The vast majority of investors require real capital returns over time as they invest to build their capital over the long-term. An excessively bearish approach risks missing the capital growth, which is the very purpose of making investments in the first place.

“With that in mind, and to counter balance to the slew of negative commentary calling for a correction (defined as a fall of between 5% and 20%) or even a bear market, it’s important to consider the risk of a further substantial leg higher in markets.

“In support of this possibility, there’s one obvious argument: equity markets go up the vast majority of the time and  smaller corrections are much more common than the bigger market crashes. Despite three major setbacks in the last few decades, there have also been extended periods of substantial rises interrupted only by the smaller corrections. It’s human nature to expect the recent past to repeat itself, but a look at longer-term history suggests the repeated pattern of market collapses is the exception, not the norm.

“There are other factor  which support a positive outlook, the most obvious being the strength of the economy worldwide. Growth expectations have been rising, and growth is already strong, while inflation remains under control. This growth is feeding through into company earnings growth, tempering the seemingly high valuations compared to some of recent history.

“These valuations also need to be contextualised in terms of the meagre returns available from the alternatives such as government bonds, index linked securities and corporate bonds. Only real assets such as equity and property appear to be valued similarly to long term norms, whereas all fixed income assets appear to be very richly valued, particularly when inflation and expected inflation are taken into account.

“Equities on the other hand, even at current valuations, offer the prospect of some income growth in line or above inflation and a current dividend yield of around 2% (on the low yielding S&P 500 Index). Arguably, that implies an attractive equity risk premium.

“Another supportive argument is the weight of potential buying. Much attention has been given to the baby boomer generation’s buying of bonds as they near retirement, but this could potentially be highly risky  if inflation remains at current levels or rises. However, this appetite for bonds makes financing costs extremely low for business, particularly those in the buyout space.

“Private equity has been raising record amounts recently and this money needs to be put to work, most likely by buying publicly listed companies, creating a new marginal buyer. There’s a reasonable chance of a spate of takeovers spurring markets on in the coming months, particularly if the buyers think the window of opportunity of financing at ultra-low rates may soon close as central banks continue the slow trajectory of interest rate rises.

“On balance, there are plenty of positive arguments to offset the continuous worries from the pundits, many of whom have been calling for a massive fall right from the start of this long bull market. In fact, the market now looks much less dependent on the artificial support from abnormal central bank policy, and much more driven by genuine profit and revenue growth from a strong global economy.

“Of course, there will be worries about the amount of debt in the world and the effect of interest rate rises on these over-indebted companies. As central bankers are more worried about financial instability than they are about inflation, it’s unlikely that short-term interest rates will be raised aggressively to fight inflation while debt remains an issue.

“As a consequence, we remain constructive on equity, particularly economically sensitive and thematic growth areas, although we continue to temper this by having a low exposure to highly leveraged business and a low overall equity weight relative to history.”

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A rare sight? UK blue chips, sterling rise in tandem

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A rare sight? UK blue chips, sterling rise in tandem 1

By Joice Alves and Ritvik Carvalho

LONDON (Reuters) – A surging pound is failing to hold back Britain’s exporter-heavy blue-chip FTSE 100 in 2021, as its impact is outweighed by expectations vaccine rollouts will boost global economic growth and commodity prices will rise.

Sterling, the best performing G10 currency in 2021, has risen to near its highest in three years as global investors chase assets in countries whose vaccine programmes are ahead, and on some relief that a Brexit deal was agreed.

Reflation trade’s big FX winner: GBP

The British currency and the FTSE 100 tend to move in opposite directions. Almost 80% of UK blue-chip firms’ revenues come from abroad and a stronger pound makes them less competitive, while their stocks become pricier for overseas investors.

But the FTSE 100 is the best-performing equity market in 2021 even as sterling rallies, which would usually hit company earnings projections.

Analysts say both sterling and the FTSE are poised for growth, as an economic boost from vaccination rollouts and a rebound in commodity prices, which particularly helps the resource-heavy FTSE, outweigh the impact of a strong pound on stocks.

FTSE 100 outperforms in 2021

A rare sight? UK blue chips, sterling rise in tandem 2

“If a really strong recovery takes hold, with commodities prices in the vanguard, the pound’s influence could prove to be less powerful than the earnings and dividend streams of the big miners and oil producers,” said Russ Mould, investment director at AJ Bell.

Goldman Sachs analysts, bullish on oil and copper prices, see further FTSE support from rising commodity prices.

Expecting a potentially expansionary UK budget on Wednesday and seeing a very slim chance that the Bank of England will cut interest rates, the U.S. bank sees sterling outperforming.

This isn’t the first time the negative correlation between sterling and the FTSE has broken down — during the March 2020 COVID-19 market crash both tumbled.

Past breakdowns of sterling/FTSE inverse correlation A rare sight? UK blue chips, sterling rise in tandem 3

Sterling and UK stocks remain at the mercy of global investor sentiment. When broader markets slide, British assets suffer, especially given the UK’s sizeable current account deficit, so the twin rebound may rely on a benign market backdrop.

But valuations look attractive for British blue-chip stocks, which trade at 14.6 times 12-month forward earnings, a far cry from the MSCI all-country world stocks index’s 20x, according to Refinitiv data.

“The UK market has been a serial underperformer for some time,” Mould said. “If we get an inflationary recovery, then the UK could be just what investors are looking for: plenty of exposure to a cyclical upturn, especially via commodities; cheap, after its underperformance.”

UK stocks are one of the cheapest

A rare sight? UK blue chips, sterling rise in tandem 4

(Reporting by Joice Alves and Ritvik Carvalho; Editing by Tommy Wilkes and Jan Harvey)

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Sterling eases to 2-1/2 week low against dollar

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Sterling eases to 2-1/2 week low against dollar 5

By Ritvik Carvalho

LONDON (Reuters) – Sterling eased to its lowest level against the dollar in two and a half weeks on Tuesday, as the strengthening U.S. currency put a brake on gains that had taken the pound to 2-1/2-year highs last week.

The pound has so far been the best performing G10 currency in 2021, up 1.65% against the dollar, although its lead over other currencies is diminishing.

Bets that Britain’s rapid vaccine rollout would underpin an economic rebound boosted sterling as far as 4.2% above its year-end price to the dollar as recently as last week.

However, expectations of a faster U.S. economic recovery and for the Federal Reserve to show greater tolerance to higher bond yields than other central banks have boosted the greenback in recent days.

By 0838 GMT, sterling was 0.2% lower at $1.3897, earlier hitting a 2-1/2 week low of $1.3867. It was flat to the euro at 86.42 pence.

“Momentum in sterling has somewhat eased in the past few days, but ever more encouraging data on vaccination and contagion in the UK should continue to underpin hopes of a faster recovery, and keep a floor under the currency,” ING said in a note to clients.

British house price growth picked up unexpectedly last month, mortgage lender Nationwide said on Tuesday, defying expectations of a slowdown as finance minister Rishi Sunak prepares new budget measures to boost the market.

House prices rose 6.9% in annual terms in February from 6.4% in January, Nationwide said, above all forecasts in a Reuters poll of economists that had pointed to a slowdown to 5.6%.  Sterling eases to 2-1/2 week low against dollar 6)

(Reporting by Ritvik Carvalho)

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Lindt & Spruengli aims for 6-8% sales growth, announces share buyback

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Lindt & Spruengli aims for 6-8% sales growth, announces share buyback 7

By Silke Koltrowitz

ZURICH (Reuters) – Swiss chocolate maker Lindt & Spruengli said on Tuesday it aimed for 6-8% organic sales growth this year thanks to pent-up demand after the pandemic hit its business and made net profit slide last year.

Chocolate makers are grappling with subdued demand as consumers buy fewer chocolates as gifts or while traveling during the COVID-19 pandemic, and Lindt has also been hit by the temporary closure of its own stores.

Net profit fell 37.5% to 320.1 million Swiss francs ($349.53 million) in 2020, the maker of Lindor chocolate balls and gold foil-wrapped Easter bunnies said in a statement.

But the company said it was convinced that the chocolate market, and in particular the premium segment it operates in, would continue to grow in the future.

It said it expected organic sales to grow 6-8% this year and then, from 2022 onwards, 5-7% per year in line with its medium term guidance.

The Zurich-based company also announced a new share buyback programme of 750 million francs from June this year to the end of next year and will pay out a dividend of 1,100 francs per registered share and of 110 francs per participation certificate.

It had paid out an exceptionally high dividend for its anniversary last year.

“Overall, a solid print with cash flow and the announcement of a buyback the main positive surprises,” Kepler Cheuvreux analyst Jon Cox said, adding the outlook was also upbeat, but more or less in line with street expectations.

Lindt & Spruengli had already flagged a 6.1% drop in 2020 organic sales in January. The contraction in sales led its operating profit margin to fall to 10.5%, from 13.2% in 2019.

It said the margin should return to 13-14% this year and then to 15% in 2022.

($1 = 0.9158 Swiss francs)

(Reporting by Silke Koltrowitz; Editing by Riham Alkousaa and Brenna Hughes Neghaiwi)

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