Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
2021 has been a bit of a mixed bag so far for investments. In equity markets, the US has once again led the way with returns of 15.5%* but the UK has finally had a resurgence and returned a respectable 13.3%*, with Europe not too far behind on 11.2%.
In contrast, Emerging Markets and Asia have posted more modest gains of 4.6%* and 3.4%* respectively, while Japan has seen its stock market fall 4.7%*. Bonds have also struggled with global government bonds down 5.9%*, global corporates down 2.8%* and only global high yield bonds clinging on to positive territory with gains of 0.9%*.
As we pass the half-way point of the year, we asked some Elite Rated fund managers for their thoughts on what the last six months of 2021 could hold in store for their asset classes.
Richard Kaye, Comgest Growth Japan
“Japan could see a major turnaround in performance, with several forces at play, most of all our favourite – fundamentals. Japan has underperformed global markets since early April largely on fears of the slow vaccine roll-out. Foreigners were the main sellers, so foreigner-favourite Japanese stocks, some of which we own, suffered disproportionately. Japan’s vaccine campaign is now storming ahead, with almost 0.8% of the population being inoculated each day, and a monster consumer season about to break in the summer and autumn.
“As long-term investors we believe Japan remains an attractive and liquid market where we can access some of the world’s best quality growth companies. The foreign press is full of Toshiba, but amongst the 3000 other Japanese listed companies offer lies unprecedented opportunities for the selective, long-term investor.”
Christopher Garsten, Waverton European Capital Growth
“There is no doubt that, after huge government stimulus packages, economies are booming. Investors love it and are optimistic, particularly anything technology or ESG related. But euphorias are generally risky investment environments. Fortunately, there are still segments of the market that we think offer very good value, for example the ‘Covid cyclicals – companies that, pre-pandemic, had a stable demand environment that was thrown upside down by Covid. By necessity, they needed to cut costs and, in some cases, did so dramatically.
“Longer term, we also think a number of engineers will benefit from an investment super cycle as the world invests in an effort to control global warming. Predicting market levels is notoriously difficult as there are so many variables but there are some very interesting opportunities available.”
Taymour Tamaddon, T. Rowe Price US Large Cap Growth Equity
“In the large cap space, there are several key market themes we’re monitoring. First, we think there will be periods of volatility as we get back to a new normal, especially as much of the recovery has been priced into markets. Second, politics and the Biden administration’s emerging priorities will remain in the spotlight. Third, disruption caused by new technologies will continue, which in turn should create style dispersions among equity classes.
“Finally, we are keeping a close eye out for signs of inflation, and it seems almost certain that we won’t have continued disinflation in the near term. Longer term, markets will also no longer have the tailwind of falling rates, although they could remain at historically low levels if the inflation impulse fades.”
Simon Brazier, manager of Ninety One UK Alpha
“The strength of markets still seems to suggest that the recovery will be swift. Although the UK’s vaccine rollout is clearly going very well, and this year promises some semblance of normality, the consequences of the pandemic for the UK economy will be long lasting and deeply structural. There continue to be a number of material risks that investors must remain cognisant of, including the UK’s elevated debt levels and Brexit, given it is still unclear how challenging the transition will be for businesses.
“However, we are still finding many opportunities of companies that can grow, have embraced technology and will exit the pandemic in a strong position. The key for investors is to have a diversified approach and own those companies that can navigate a world of geopolitical stress, economic uncertainty and structural change.”
Rajiv Jain, GQG Partners Emerging Markets Equity**
“If I told investors that, over the last 20 years, Russia at an index level has performed as well as the Chinese index, they would be very surprised. But actually, if you strip out Tencent, Alibaba, and a couple of those similar names, returns have been better than in China. I do not believe there will ever be another Tencent in China, because the authorities do not want what they call ‘tall poppy syndrome’, and regulatory crackdowns will be ongoing.
“On the other hand, the opportunity set in other emerging markets seems to be improving. Brazil’s historically low interest rates are bringing back credit demand, while its banking system is in very good shape. And I think financials is one of the best places to be an investment ‘tourist’. If you take a ten to 20-year view, finance companies have an uncanny ability to get into trouble. However, they become a very dependable best friend during the aftermath of a crisis, because they have to put their heads down and work on futureproofing their businesses.”
Roger Skeldon, TIME:Commercial Long Income
“I expect to see investors looking to move away from allocating to traditional commercial property like office and high-street retail which are experiencing structural change. Instead, they are likely to continue to move into alternative real estate sectors such as healthcare, social housing, education and logistics. These sectors have continued to operate throughout the pandemic as the services and care provided at these properties are essential. Such sectors are indicating long-term trends highlighting increased demand in the future and are also heavily undersupplied in terms of quality real estate available.
“That said, we still have some exposure to the hotel and leisure sectors, which have suffered as a result of being closed for much of the last year. Despite this, we believe that long-term demand remains for these sectors and expect trading to pick back up as lockdown restrictions are eased, and the economy continues to open up further. We anticipate these sectors to experience a recovery over the medium to long term. With concerns around increased levels of inflation, long income property, where rent reviews are typically linked to an inflation index or contain fixed uplifts, offers
investors an attractive option.”
Mike Riddell, Allianz Strategic Bond
“We know that year-on-year inflation is currently eye-wateringly high and global growth will be exceptionally strong in the next 3-6 months as the global economy opens up. But both of these things are likely to be temporary.
“Some of the huge recent cyclical tailwinds, such as the fourth great credit bubble that China engineered in 2020, will likely become headwinds over the second half of 2021. The commodity price surge itself should put a break on growth. The long-term drivers of global growth, and global sovereign bond yields (deteriorating demographics, higher debt levels) will kick in again from 2022. Given our more sanguine views about lower growth and subdued inflationary pressure longer term, we think that valuations in most developed markets are OK, and valuations in most emerging market local rates markets are outright cheap.”
Mike Scott, Man GLG High Yield Opportunities
“Rising inflation has been a key theme for investors in 2021 as they fear rate rises may follow. However, we believe that high yield will be the least impacted credit market given that it is more sensitive to the business cycle than it is to the interest rate cycle. Essentially, rising rates tends to imply positive economic growth which is a plus for high yield issuers and enables them to service their debt while reducing the risk of default. A key characteristic of high yield is that the bonds tend to be shorter in duration and therefore less sensitive to interest-rate changes. Furthermore, the bonds maturing quicker therefore the capital repaid can be reinvested sooner into newer bonds with higher coupons.
“We see risk assets moving into a more challenging phase through Q2. The economic recovery has become consensus and is reflected in valuations particularly of cyclical sectors which currently offer declining risk-reward, in our view. We believe a mid-cycle correction continues to be increasingly possible and we are positioned accordingly.”
*Source: FE fundinfo, total returns in sterling, 31 December 2020 to 5 July 2021 using BB Global High Yield, BB Global Aggregate Corporate, ICE BofA Global Government, S&P 500, FTSE All Share, MSCI Europe ex UK, MSCI Asia ex Japan, Nikkei 225 and MSCI Emerging Markets indices.
**Source: Investment Week, 5 July 2021