Rotations, Valuations, & Reflections
Market Insight, 30/04/2021
The Tideway Investment Committee sat this week and as ever heard fascinating insights from Martin Shenfield from TS Lombard and benefited from thorough preparation and analysis from our Investment Director Nick Gait.
Looking at world events from an economic and market perspective naturally focuses us in on events in the US and China as the world’s two biggest economies and with US companies dominating world equity markets by overall valuation. No discussion I am afraid around the outrageous costs of high-end wallpaper and the relative merits of John Lewis furniture!
Not much has changed in TS Lombard’s, or Tideway’s, views on how to allocate investments in portfolios:
· We remain very negative on Government bonds and happy with our fixed income investments, not expecting them to shoot the lights out this year, rather to provide a steady inflation plus return and dampen down the volatility of portfolios.
· Ten-year US treasury yields have settled at just below 1.7%, TS Lombard see 1.75% as fair value right now, with rates likely to grind higher to around 2% over the rest of the year and peaking at around 2.5% as economies recover. Inflation is low for now, with TS Lombard’s expectation being it will stay low this year and rise next year but not likely to shoot up.
· Solid returns are continuing from our real alternative assets; infrastructure, global real estate and the Sanlam multi strategy fund.
· Asia and Emerging Markets have been held back a bit in recent weeks; China’s handling of its tech stock leaders and Jack Ma in particular (an update story in its own right) plus Brazil and India still suffering the most from the virus. We continue to have strong conviction for the longer term in these markets and returns from active management, particularly in Emerging Markets, is outstripping index tracking fund returns by good margins.
· The rotation of stronger returns to value as compared to growth stocks continues, although many growth companies are holding up pretty well, and we are still keen to hold our exposures. This continued rotation is helping UK equities have a moment in the sun, which we can see might continue despite machinations in No 10.
Two key risks to a continuing bull market were considered:
1. US policy misfiring resulting either in a spike in the value of the US Dollar, which hurts economies that have borrowed dollars, typically emerging economies (historically not good for US Equities either), or an over done contraction in the US Feds balance sheet removing liquidity from markets, a feature that has a clear correlation to market prices.
2. The markets themselves. Have valuations gone too far to fast?
The Fed’s responses to date have been pretty good and these monetary policy risks were considered well flagged and likely to be avoided.
On valuations this week we have seen a number of interesting results from high profile businesses in the UK and US:
· In the UK Barclays posted a record quarterly profit of £2.4bn and NatWest (ex RBS) announced profits just shy of £1bn, both benefiting from better-than-expected loan write downs and both with shares up 50-60% in the last 6 months, although the share price of both banks are flat to down a bit over 5 years. The NatWest improvement might finally see the UK taxpayer get their bailout money back ???? ……it will only have taken thirteen years.
· In the US Microsoft generated $15bn of profit beating expectations and Facebook recorded $9.5bn. Facebook’s profits are up almost 100% year on year, and Microsoft’s up around 40%. The two company’s shares are only up around 20% in the last 6 months, Facebook is up around 300% in 5 years and Microsoft 500%!
Microsoft’s valuation is around 30 times this quarter’s earnings per share. Assuming profit growth continues and noting their CEO Satya Nadella says their Cloud business is being built for the next decade, we don’t think that is a crazy price.
Facebook’s shares jumped 7% on the announcement of its results. Facebook is slightly cheaper than Microsoft at 25 times the quarter’s earnings per share.
Barclays and NatWest are valued at around 7 and 5 times those earnings respectively.
Those big so-called US tech stocks are anything but loss making tech start-ups trading on hope and future profits, they are now mature profit machines both well positioned to exploit the shift to digital working and e-commerce. There will of course be challenges for them ahead but they appear to be warranting their valuations. The much hated and under invested UK banks have had a dire decade, but they are not dead and the value and potential for further gains is clear.
Finally, with the production this week of our Quarter 1 portfolio factsheets we were able to reflect on the returns delivered since September 2016 when we launched our model portfolio suite almost five years ago. Whilst not without its ups and downs the returns on our Stable Return 2 and 3 portfolios have meant that clients have made around 25% and 35% respectively after allowing for all fees since inception. This has been in a period when inflation has added less than 10% to the average costs of goods and services and indeed to defined benefit pension benefits and means the returns are well ahead of the targets we set for the portfolios.
The content of this document is for information purposes only and should not be construed as financial advice.
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Investment Update, 30/04/2021