As we move through the start of 2021, Covid-19 is clearly the biggest issue that the globe is still grappling with.
There is a long way to go in the fight against the virus, but as the lockdowns and vaccine roll-outs continue, there is the collective hope that we will see some move towards ‘normality’ as the year progresses. The virus aside, there remain numerous challenges for investors in the year ahead, so what are the top 3 concerns keeping our Multi-Asset portfolio managers awake at night?
1. Inflation: fearing the fear
There has been increasing noise that a material rise in inflation is on the horizon, but is there any hard evidence? Some – we have already seen global price pressures in commodities, and US survey data also reflects increasing upwards force on prices. Bond markets have been affected; there has been a rise in breakeven inflation in the US, but the Federal Reserve has kept things under control…so far. However, if nervousness increases, the Fed may be forced to take action to quell market fears. Will this feed through into a more sustained generalised rise in inflation? We think not, as there is still slack in the economy. So, we fear the fear of investors forcing the Fed to act and instigating shorter-term market moves and volatility, but we don’t fear a fundamental long-term rise in inflation.
2. Equity valuations: tracking your Teslas
Despite virus-induced lockdowns and huge hits to economies, equity markets continue to forge ahead and post historic highs. Taken in isolation, some earnings multiples are at levels above those recorded pre the bursting of the dot com bubble, and these levels are making some investors nervous. As Multi-Asset investors, we take a balanced view across all asset classes, and with the huge burden of debt being built up by governments across the globe, bond yields are set to stay very low for much longer, meaning that in relative terms, equities look cheap. That being said, as active investors, we don’t make broad-brush allocations to asset classes or regions. There are pockets of excess in certain equity markets, and so for us, it makes sense to ‘track your Teslas’ and make sure you are undertaking fundamental research to avoid investing in those stocks where the share price is being driven by speculation rather than the company’s true earnings potential.
3. Growth vs value: finding your fundamentals
Growth stocks dominated equity returns in 2020, and, although value outperformed growth in the first few weeks of the year, growth surged back towards the end of January. Commentators scribed countless notes in the latter part of last year, mooting that it would soon be time for value stocks to take the lead, post the surge in growth stocks that has been led by tech companies. Tech appeared to be stretching its valuations to speculative levels, whilst value stocks usually accompany economic recoveries due to their cyclical characteristics; but the great rotation into value has yet to materialise. It is always risky to assume that markets will follow any previous patterns, and the current economic crisis, along with the beginnings of the recovery from it, are unlike anything that has come before. Perhaps it is prudent not to pitch growth against value, but examine each stock on their individual merits. A growth stock could have had a stellar run of performance yet its fundamentals may show there is still further room for upside; similarly, a stock trading at a discount may not exhibit good value if there is an inherent problem with the business model that is driving the discount. We believe that fundamental research presents better investment opportunities than trying to predict when to rotate out of one trend and into the next.
