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Market Commentary



Markets continued to push higher during the final months of 2020 as positive vaccine trials were announced and investors started to believe that the rollout of vaccinations in 2021 would return the global economy back to something approaching normality. As a result, sectors that have been seen as ‘COVID-19 losers’ (such as travel & leisure, oil & gas and financials) started to perform strongly. Alongside the remarkably swift development of effective vaccines, the COVID-19-induced economic collapse and recovery would appear to be moving at ‘warp speed’ compared to previous economic cycles. 

A synchronised global economic recovery during 2021 is now anticipated by market participants, helped not only by the lifting of lockdowns but also the dual tail winds of pent-up demand and restocking. Globally, the number of companies seeing earnings forecasts revised up in comparison to those seeing downward revisions is high relative to history.

An increase in ‘mergers and acquisitions’ activity can be expected as private equity and strongly capitalised listed companies take advantage of cheap and plentiful debt financing to consolidate sectors by acquiring firms with good market positions but compromised balance sheets.

These positive developments allied with greater clarity over the direction of US policy following the US elections (and, more marginally, Brexit) are likely to continue to persuade investors to move cash, which has been sitting on the sidelines, back into equity markets.

Our base case, therefore, is that equity markets can continue to move higher, perhaps materially so, and those more economically sensitive companies which started to lead the markets higher in recent months will continue to do so, boosted by the news from the United States that the Democratic Party, which favours introducing additional near-term economic stimulus measures, controls both the House of Representatives and the Senate, albeit with wafer thin majorities.

However, there are some significant caveats.

Firstly, there is a distinct risk that one or more COVID-19 variants may materialise which require the reformulation of existing vaccines to ensure good efficacy and this could reduce the speed and scale of the recovery.

Secondly, policymakers are generally agreed that policy tightening measures, such as austerity and interest rate rises, were brought in too swiftly following the global financial crisis of 2008/9 and these errors impaired the subsequent recovery. The same mistake must not be repeated.

Thirdly, the consensus believes the outlook for inflation, in the medium term, is benign. This is crucial as low inflation helps anchor interest rates at low levels, which in turn are used to value companies. Any sustained increase in interest rates, as a result of higher inflation expectations, could have the twin effects of undermining corporate valuations and reducing economic growth. 

We believe companies in numerous sectors will try to boost margins (via pricing) in order to recoup some of their 2020 losses.

Policymakers will have to tread a fine line between allowing economic momentum to build a head of steam and ensuring investors remain confident that inflation will remain under control in the medium term. This will become increasingly difficult as the year progresses, as year-on-year comparisons of inflation could come in significantly higher than expected due to base effects at a time of strong global economic growth. Furthermore, we believe companies in numerous sectors will try to boost margins (via pricing) in order to recoup some of their 2020 losses and/or service their expanded debt obligations. As a result, we expect interest rates to continue to rise as the recovery progresses. Nonetheless, we also believe that there is a decent amount of headroom available before interest rates could be considered problematic. We will continue to review and challenge this view as a future change in investor sentiment from ‘greed’ to ‘fear’, as a result of higher interest rates, could be both swift and brutal.

Given our thoughts concerning the economic recovery and the potential for interest rates to rise from current very low levels, we believe government bond prices are likely to produce negative returns in the near term. We prefer index-linked Gilts which protect against inflation expectations rising. While falling government bond prices will have an impact on corporate credit returns given their use as a reference price, we believe spreads can tighten further such that higher yielding corporate credit can still generate positive returns.

The UK is managing to roll out vaccinations more swiftly than its major trading partners and this is likely to boost confidence in a return to ‘normal’

We continue to hedge some of the risk that Sterling might rise from current levels. If this happened, it would reduce returns on overseas assets held by UK-based investors. The announcement of a new, more transmissible UK COVID-19 variant has induced harsher lockdowns and will produce an even larger budget deficit than previously forecast and we think this news has dampened sentiment to Sterling despite the announcement of a Brexit deal. However, the UK is managing to roll out vaccinations more swiftly than its major trading partners and this is likely to boost confidence in a return to ‘normal’. We may also discover that the new trading arrangements with Europe are manageable and the negative short-term effects of increased paperwork, etc., may diminish as a source of concern. We anticipate the European Union will start granting equivalence to some segments of the UK’s financial services industry in the coming months and this will also improve sentiment. Given Brexit clarity and a stable, relatively business-friendly government, international investors should start to buy Sterling assets and this would provide further support for Sterling.

Overall, we remain constructive on the outlook for risk assets.

Defensive - Investment Performance

The Defensive fund produced a strongly positive total return for the three months to the end of January.

The fund’s fixed income holdings produced a positive return decently ahead of the Gilt market return. Sequoia Economic Infrastructure Income fund, the specialist credit fund, produced the largest positive contribution helped by a positive portfolio update and spread tightening.

International equities provided the significant contribution to the fund’s positive return and the fund’s holdings, in aggregate, performed strongly. Most noteworthy were the returns of the Blackrock Emerging Market fund and the Sterling hedged Polar Capital Global Convertible fund which outperformed their respective indices by a material amount. The other Sterling hedged share classes that we hold also contributed to performance as they helped protect international returns from Sterling strength. 

The UK stock market produced a strong return over the period (MSCI UK All Cap NR index, +16.7%), as investors bought stocks which are economically sensitive following the emergence of news that several vaccines were effective at combating COVID-19. The fund’s portfolio of direct UK equities lagged the market rally. The most noteworthy contributor to performance was Royal Dutch Shell which rose 39% aided by the announcement that the Saudis, in particularly, were going to cut oil production meaningfully. Other strong performers included BP and Weir Group. Future Group produced a negative return as investors digested the news that the firm had made a ‘bold’ strategic acquisition. Over the calendar year 2020, the fund’s UK equity portfolio materially outperformed the market.

The ‘other assets’ portion of the portfolio performed well over the period. All sub sectors except for gold produced strong returns. Commercial Real Estate was the standout performer as the share price of British Land plc (central London offices and regional retail properties) responded strongly to the vaccine news. Within Absolute Return, the H20 Natixis MultiReturn fund performed particularly well.

Cautious - Investment Performance

The Cautious fund produced a strongly positive total return for the three months to the end of January.

The fund’s fixed income holdings produced a positive return decently ahead of the Gilt market return. Sequoia Economic Infrastructure Income fund, the specialist credit fund, produced the largest positive contribution, helped by a positive portfolio update and spread tightening.

International equities provided the significant contribution to the fund’s positive return and the fund’s holdings, in aggregate, performed strongly. Most noteworthy were the returns of the Blackrock Emerging Market fund and the Sterling hedged Polar Capital Global Convertible fund which outperformed their respective indices by a material amount. The other Sterling hedged share classes that we hold also contributed to performance as they helped protect international returns from Sterling strength. 

The UK stock market produced a strong return over the period (MSCI UK All Cap NR index, +16.7%) as investors bought stocks which are economically sensitive following the emergence of news that several vaccines were effective at combating COVID-19. The fund’s portfolio of direct UK equities lagged the market rally. The most noteworthy contributor to performance was Royal Dutch Shell which rose 39% aided by the announcement that the Saudis, in particularly, were going to cut oil production meaningfully. Other strong performers included BP and Weir Group. Future Group produced a negative return as investors digested the news that the firm had made a ‘bold’ strategic acquisition. Over the calendar year 2020, the fund’s UK equity portfolio materially outperformed the market.

The ‘other assets’ portion of the portfolio performed well over the period. All sub sectors except for gold produced strong returns. Commercial Real Estate was the standout performer as the share price of British Land plc (central London offices and regional retail properties) responded strongly to the vaccine news. Within Absolute Return, the H20 Natixis MultiReturn fund performed particularly well.

Managed Growth - Investment Performance

The Managed Growth fund produced a strongly positive total return for the three months to the end of January.

The fund’s fixed income holdings produced a positive return decently ahead of the Gilt market return. Sequoia Economic Infrastructure Income fund, the specialist credit fund, produced the largest positive contribution helped by a positive portfolio update and spread tightening.

International equities provided the significant contribution to the fund’s positive return and the fund’s holdings, in aggregate, performed strongly. Most noteworthy were the returns of the Blackrock Emerging Market fund, the Schroder Asian Income fund and the Sterling hedged Polar Capital Global Convertible fund which all outperformed their respective indices by a material amount. The other Sterling hedged share classes that we hold also contributed to performance as they helped protect international returns from Sterling strength. 

The UK stock market produced a strong return over the period (MSCI UK All Cap NR index, +16.7%) as investors bought stocks which are economically sensitive following the emergence of news that several vaccines were effective at combating COVID-19. The fund’s portfolio of direct UK equities lagged the market rally. The most noteworthy contributor to performance was Royal Dutch Shell which rose 39% aided by the announcement that the Saudis, in particularly, were going to cut oil production meaningfully. Other strong performers included BP and Weir Group. Future Group produced a negative return as investors digested the news that the firm had made a ‘bold’ strategic acquisition. Over the calendar year 2020, the fund’s UK equity portfolio materially outperformed the market.

The ‘other assets’ portion of the portfolio performed well over the period. All sub sectors except for gold produced strong returns. Commercial Real Estate was the standout performer as the share price of British Land plc (central London offices and regional retail properties) responded strongly to the vaccine news. Within Absolute Return, the H20 Natixis MultiReturn fund performed particularly well.

Growth - Investment Performance

The Growth fund produced a strongly positive total return for the three months to the end of January.

The fund’s fixed income holdings produced a positive return decently ahead of the Gilt market return. Sequoia Economic Infrastructure Income fund, the specialist credit fund, produced the largest positive contribution helped by a positive portfolio update and spread tightening.

International equities provided the significant contribution to the fund’s positive return and the fund’s holdings, in aggregate, performed strongly. Most noteworthy were the returns of the Blackrock Emerging Market fund, the Schroder Asian Income fund and the Sterling hedged Polar Capital Global Convertible fund which all outperformed their respective indices by a material amount. The other Sterling hedged share classes that we hold also contributed to performance as they helped protect international returns from Sterling strength. 

The UK stock market produced a strong return over the period (MSCI UK All Cap NR index, +16.7%) as investors bought stocks which are economically sensitive following the emergence of news that several vaccines were effective at combating COVID-19. The fund’s portfolio of direct UK equities lagged the market rally. The most noteworthy contributor to performance was Royal Dutch Shell which rose 39% aided by the announcement that the Saudis, in particularly, were going to cut oil production meaningfully. Other strong performers included BP and Weir Group. Future Group produced a negative return as investors digested the news that the firm had made a ‘bold’ strategic acquisition. Over the calendar year 2020, the fund’s UK equity portfolio materially outperformed the market.

The ‘other assets’ portion of the portfolio performed well over the period. All sub sectors except for gold produced strong returns. Commercial Real Estate was the standout performer as the share price of British Land plc (central London offices and regional retail properties) responded strongly to the vaccine news. Within Absolute Return, the H20 Natixis MultiReturn fund performed particularly well.

Progressive - Investment Performance

The Progressive fund produced a strongly positive total return for the three months to the end of January.

International equities provided the significant contribution to the fund’s positive return and the fund’s holdings, in aggregate, performed well. Most noteworthy were the returns of the Blackrock Emerging Market fund, the Schroder Asian Income fund and the Sterling hedged Polar Capital Global Convertible fund which all outperformed their respective indices by a material amount. The other Sterling hedged share classes that we hold also contributed to performance as they helped protect international returns from Sterling strength. 

The UK stock market produced a strong return over the period (MSCI UK All Cap NR index, +16.7%) as investors bought stocks which are economically sensitive following the emergence of news that several vaccines were effective at combating COVID-19. The fund’s portfolio of direct UK equities lagged the market rally. The most noteworthy contributor to performance was Royal Dutch Shell which rose 39% aided by the announcement that the Saudis, in particularly, were going to cut oil production meaningfully. Other strong performers included BP and Weir Group. Future Group produced a negative return as investors digested the news that the firm had made a ‘bold’ strategic acquisition. Over the calendar year 2020, the fund’s UK equity portfolio materially outperformed the market.

The ‘other assets’ portion of the portfolio produced a positive return. Positive returns from the infrastructure and private equity sub sectors outweighed the negative return produced by the fund’s holding in gold.

Managed Income - Investment Performance

The Managed Income fund produced a strongly positive total return for the three months to the end of January.

The fund’s fixed income holdings produced a positive return decently ahead of the Gilt market return. Sequoia Economic Infrastructure Income fund, the specialist credit fund, produced the largest positive contribution helped by a positive portfolio update and spread tightening.

International equities provided the significant contribution to the fund’s positive return and the fund’s holdings, in aggregate, performed strongly. Most noteworthy were the returns of the Blackrock Emerging Market fund, the Schroder Asian Income fund and the Sterling hedged Polar Capital Global Convertible fund which all outperformed their respective indices by a material amount. The other Sterling hedged share classes that we hold also contributed to performance as they helped protect international returns from Sterling strength. 

The UK stock market produced a strong return over the period (MSCI UK All Cap NR index, +16.7%) as investors bought stocks which are economically sensitive following the emergence of news that several vaccines were effective at combating COVID-19. The fund’s portfolio of direct UK equities outperformed the market rally. The most noteworthy contributor to performance was Royal Dutch Shell which rose 39% aided by the announcement that the Saudis, in particularly, were going to cut oil production meaningfully. Other strong performers included BP and Weir Group. Over the calendar year 2020, the fund’s UK equity portfolio outperformed the market by a decent margin.

The ‘other assets’ portion of the portfolio performed well over the period. All sub sectors produced strong returns. Gold, which produced a negative return during the period, is not held in the fund. Commercial Real Estate was the standout performer as the share price of British Land plc (central London offices and regional retail properties) responded strongly to the vaccine news. Within Absolute Return, the L&G Multi Asset Target Return fund performed well.

Hector Kilpatrick
Senior Investment Director - Head of Risk Managed Funds
3 February 2021

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (http://www.msci.com/)

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