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In a year where the statement “that will never happen” has had to be put firmly to one side, to finish the year off in suitable style we are approaching a Christmas where we are asked to choose just two bubbles with which we can share our Christmas festivities. New Year’s will certainly be a much quieter affair.
We have new phrases such as “Furlough” and we previously thought the R rate was some measure of how many people chose to participate in “Talk Like A Pirate Day” (September 19th if you had forgotten). It feels as though everything has changed. Yet, from an investor’s perspective, it seems the same old growth sectors are still leading the way.
There is quite rightly much talk about the vaccines that have been announced and now successfully deployed, allowing us all to get back to normal. But what was “normal” before the virus struck? The markets first woke up to the risks that COVID-19 posed on February 21st this year. That was the day that the first meaningful correction occurred. Let us consider the previous “normal” to be from the 1st January 2019 right up until the 21st February 2020 – the period wherein investors were making their predictions of what the future held and how certain sectors would react, all things being equal. If we fast-forward to today, there is a lot of talk about “value” stocks such as financials, energy, travel and industrials, at last, having their time in the ascendancy over their “growth” counterparts. Many a fund manager is desperate for this to be true, having generally underperformed (except for the odd period) since 2008. But if we look at what was performing well in the “old normal” it poses the question as to why it should all change as we emerge into the “new normal”.
Much has been written about a great rotation – the long-awaited passing of the baton from growth to value. On November 6th it finally happened when Pfizer announced the first successful vaccine. We witnessed the single biggest one-day rotation in history, unfairly labelled the “dash to trash” in some quarters. That is not fair on most of the companies that shot up on the day. They are undoubtedly good companies in the “wrong” sectors. In our portfolios we have been nibbling away at some value opportunities over the past eight weeks to correct a large underweight to this investment style, however we still feel this is more of a short-term opportunity, to be played out over the next six months. Successful vaccinations are key to this recovery, along with short term inflation pressures from the year on year rise in the price of crude oil (remember the negative forward price of oil last spring?). We have been able to buy into some very unloved sectors over the past eight weeks, as the world begins to tentatively open up again throughout 2021.
In a world where “lower for longer” remains the most likely outcome for interest rates for some time to come, as Governments wish to keep their debt repayments on colossal levels of borrowing as low as they possibly can, something needs to change for value equities to sustain a recovery. At this moment in time I am not sure what that can be. Technology based companies still look well placed to continue their adaption to changing consumer and business trends in the new Covid environment and it may well be that our overweight to this area reasserts itself in 2021.
As we move towards the weekend, all eyes remain (in Europe and the UK at least) on the ongoing Brexit negotiations. We expect weak GDP figures for the first quarter of 2021 after November’s lockdown and the tighter tier restrictions currently in place in the UK. A positive Brexit resolution with some type of watered-down trade deal would certainly be a good news story as we move towards the years end.