Further to our previous updates please find below our latest commentary, as of Thursday 19th November. We will continue to provide regular information and further observations to help support our clients.
Article written by Iain Lightfoot, Joint Managing Director, Armstrong Watson Financial Planning and Wealth Management and Richard Cole, Fund Manager at Future Money Ltd.
With two vaccine successes and a mostly conclusive US election, the news schedule this month has been busy and markets have been watching intensely. Further developments may also be coming our way, with more vaccine candidates nearing the reporting stage and, of course, Brexit negotiations look likely to conclude in the coming days or weeks. As such, it is looking increasingly likely that November 2020 could be remembered as a turning point in the dominant stories of our time.
While Donald Trump is yet to concede the US election and is still fighting a number of legal battles, aiming to overturn the result, the chance of success in this strategy looks slim. Domestically, while many Republican politicians fear a backlash from the outgoing President should they publicly acknowledge his defeat, Trump’s support is waning. Internationally, however, the issue is all but settled, with foreign governments offering their congratulations to President-elect Biden. Trump’s reluctance to accept defeat has the potential to make life difficult for the incoming administration by refusing to commence the transition process, meaning that Biden may be comparatively slow off the mark in launching his economic agenda come inauguration day. Nonetheless, markets are taking the result in their stride, with a warm reception welcoming the new president.
Further boosting the mood of markets has been the announcement of a 95% efficacy rate in Moderna’s Covid-19 vaccine, just one week after Pfizer/BioNTech’s similarly promising announcement. While the development of a vaccine in late 2020 or early 2021 had been anticipated by stock markets, an element of uncertainty was present. Therefore to have the treatments actually materialise gives greater confidence to the belief that a way through the pandemic can be seen. After all this waiting, two come along at once.
This leaves investors in a strange position, however, and one which will likely see further volatility in the short term. While the vaccines developed strengthen the argument that economic recovery will occur – as once widespread treatment is achieved, economies will be able to further reopen – this process will take many months, at a minimum. In the meantime, cases continue to rise on a global basis and especially so in the US, the world’s leading economy. The UK is clearly also in a difficult position, with the exit strategy from the current lockdown unclear and with many areas of the economy still facing challenges, of which many companies will not survive. Consequently, investors are faced with the prospect of further pain in the short term, before the promise of economic recovery, and potentially a world post-Covid, can take hold.
This balance of the short and the medium term is having an impact on the areas of the stock market which are prospering. With the global economy slumping and with populations forced to stay at home, the leading investments of this year have been large technology companies, which have enhanced the working from home experience and who’s high growth rates have been richly rewarded in a world short of profitability. At the other end of the scale, have been those companies with high sensitivity to economic output, such as banks, oil companies and airlines. In investment language, these are known as ‘value’ companies, as their current share prices are cheap relative to their historic valuations. With the virus surging and economies putting up the shutters, for much of 2020, ‘growth’ stocks have outperformed ‘value’ stocks to a large extent.
This can also be seen on an international level, due to the composition of various countries’ stock markets. The US, for example, has a high concentration in growth type companies and therefore has been a leading market over the year. The UK, on the other hand, has a larger focus on value companies (think of the big banks and energy companies that dominate the FTSE 100) and consequently has experienced relatively poor returns so far in 2020. Since the beginning of November, however, and especially since the announcement of the Pfizer/BioNTech vaccine, value stocks, and by extension, the UK’s market, has been leading the surge in stock valuations.
The recent jump in those areas most sensitive to economic output has been strong so far, yet enthusiasm must be tempered, given the potential for momentum to swing again (should virus numbers surge, or for there be significant delays in vaccine rollout, for instance). However, even if this does prove to be a false dawn and investors’ focus returns to the current economic challenges of Covid, the past nine days suggest that when attention does fully turn to economic recovery, those areas of the market which have been shunned for the most of this year may just be brought back in from the cold.
Our view is that market conditions will remain fearful in the short term however, there will come a point when sentiment will turn. When this will occur still remains uncertain, but the time of growth will come again. We believe that over the medium term we can expect a reasonable recovery in terms of economic activity and stock market levels.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
At the current time we continue to believe the appropriate course of action for most clients is patience. Other clients also continue to see this as an opportunity, with equities clearly still lower priced than they were at the start of the year, however, our philosophy remains that it is time in the market not timing the market, which is usually the best approach.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We believe that for those people who are considering taking financial advice and want to take advantage of all existing reliefs and allowances now may be a good time to do so.
Please note that the contents are based on the author’s opinion and are not intended as investment advice. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested.
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