As we move towards the end of January, most of us remain at home, awaiting the news of our turn at the vaccine and watching the horribly high number of deaths slowly rise on a daily basis. Markets have had a reasonable start to the year and as we mentioned last week, they have a habit of looking through short-term news and becoming predictive rather than reactionary. What they appear to be saying is that everything is going to be all right and the world will get back to “normal”. I suppose the issue is what will be normal.
As investors we need to be mindful of this and consider many “what if” scenarios along the way. What if the roll-out is slower than expected, what if the vaccine supplies are delayed? We therefore spend a lot of time looking into investment alternatives to diversify our clients’ portfolios and steady the investment journey along the way. The Vaccine bounce was dramatic in November, but it has not really followed through. Certain stocks that had been waiting for the vaccine rallied anywhere between 25% and 40% in one day. However, before long, new strains appeared that required additional, immediate research.
Behind all of this remains the key support to markets and global economies - the explicit addition of “financial stability” to central banks’ mandates, as identified by Dhaval Joshi of BCA Research who said, “Central banks’ explicit commitment to financial stability will force them to crush bond yields in response to any major pullback in the $500 trillion worth of risk-assets (the $500 trillion comprises $300 trillion in real estate plus $200 trillion in other risk-assets such as equities, corporate bonds, and Emerging Market debt). One important takeaway is that the structural bull market in stocks will end only when bond yields can no longer be crushed.” Given the current economic outlook and winter surge in COVID-19, we have some way to go yet. We are currently watching Treasury yields with great interest, especially since Joe Biden was sworn in as the new US President this week. The slight increase is not yet a major problem for the global economy or risky assets as long as the move is not too rapid or goes too far. It would be a problem if it was driven by a change in policy from the Federal Reserve (FED) but this is not expected until inflation is a lot higher. The current move is being driven by anticipations of better economic conditions. Yields were just under 2% before the COVID crisis and could return to that level once the pandemic has faded. In the short-term the concern is the relationship between yields and equities. If there is a rapid move towards 1.5% in the short-term then I would expect equity markets to react negatively. This might be the first test of the “buy on dips” thesis for this year. Any disruption to financial markets when the pandemic remains in full swing will further underline the commitment towards super supportive policy.
Whilst technology and healthcare have had a quieter few months, as more value orientated stocks have had some time in the limelight, it still remains a key part of our investable universe for decades to come. As one of our fund managers eloquently put it - “Technology is the Artificial Intelligence and Robotics found in Amazon factories. It is the Zoom and Microsoft Technology that makes Video Calls possible. It is the online schooling provided to our kids, it is the chips and software behind Fortnite and other video games. It is the biotechnology that found the vaccine. It is the power inside the in demand new Tesla and the GPS that guides it. It is the streaming services that give you a chance to watch Game of Thrones again or the Algorithms that suggest you try Ozark. It is the delivery of computing services that let you work from home including storage, databases, servers, networking, software, analytics, and intelligence buried in the mystical Cloud. It is the security guard buried in your PC or network keeping your digital valuables safe. In short, this new tech is everywhere and our use of it is growing exponentially.” Is it over done? Probably not, and as we have many similar long-term arguments for other assets, such as infrastructure and renewable energy, this is a key reason why we believe diversified portfolios, built with strong foundations, will navigate us through another interesting year.
As always, we hope you are keeping safe and well, should you have anything that we can help you with, please do get in touch.