30th April 2021
Since November 2020 we have been like a stuck record highlighting the opportunities and advances in the UK. It isn’t us being parochial – far from it.
It is now a matter of fact that the best global opportunities over the last 6 months have been in the UK.
For example, of the thousands of funds available, if you look at the top 20 funds since Pfizer Monday (9th November 2020), 75% are UK-invested.
You might recall from that time that we believed Pfizer Monday, when the first successful vaccine was announced, was not just a major turning point for the world financial markets, but for the UK in particular:
“the march of the vaccines, combined with the end of Brexit uncertainty, are a powerful antidote for the UK stock market, which has been under the weather since 2016, since when global investors have kept their distance. The result is that the UK stock market has never been cheaper since 1973 versus the rest of the world.”
In recent weeks fund managers are reporting profit “warnings” on the upside, with the UK economy appearing to operate much more robustly than is represented by the official GDP numbers.
Investment banks report more money flowing into the UK from overseas, and Goldman Sachs expects the UK economy to perform better than the US this year. This is all very good for confidence, and confidence drives economies in general and financial markets in particular.
If the optimistic analysis for the FTSE100 index is to hold good (i.e. that a prolonged upswing began in October 2020), the index needs to move towards 7800-8000 quite rapidly – it is currently toying with 7000.
Yet to invest successfully you must hold two opposing points of view.
At its most basic this means acknowledging that we might be wrong (and having a strategy to deal with that), as well as the notion that we might be right. At the moment this means acknowledging two highly polarised facts – US risks vs UK opportunities.
For example, those upside surprises in the U.K. must be balanced against aggressive “insider” selling in the US, insiders being the top executives. Arguably no one has a better idea of the outlook for the economy than a group of the countries top executives. Right now, they have rarely been as aggressive in selling, and disinterested in buying.
There is also a frenzy of fretting over inflation. Yet of more immediate importance to investors are scandals with Greensill and Archegos, and the raft of heavily indebted businesses which were regularly going bust before the pandemic. While these might seem unconnected, these events, and the US bubble valuations and manic investor behaviour, have all been enabled by interest rates being kept far too low, for far too long.
The solution to the problem of lower interest rates is, self-evidently, higher interest rates. But the US Federal Reserve is having none of it. In the 1970s inflation of around 15% was the problem. This was cured by higher interest rates, which got inflation down, and allowed interest rates to fall – for the next 40 years!
The problem has now flipped. Low interest rates are the problem. Debt is encouraged; complacency grows; savers take on more risk; an investor mania grows. These are all likely to persist until the Fed acts, unless of course there is another shock in the meantime, where the pandemic played that role in 2020.
Looking further afield, emerging markets are extremely cheap, and China has momentum. With the immediate exception of India, Asia generally has had a “good” pandemic, and this is evident in their stock markets, which have not needed the snake oil of zero interest rates, combined with mountainous debt and an investment mania. There are opportunities for investors here for years to come.
Continental Europe is not yet out of the woods. There are opportunities, but not such that we would dilute UK holdings to give them a place in portfolios.
On bonds (corporate or Government) it remains difficult to be optimistic with the mountainous levels of poor quality debt, inflation concerns rearing up, and interest rate jitters recurring.
Similarly with commercial property, where the shape of the post-pandemic world remains unclear.
All in all, we remain cautiously optimistic, having exposure to the obvious opportunities, while also be very conscious of the risks, and being ready to take evasive action.
If you are feeling more immediately optimistic, do get in touch with your usual adviser to discuss adding some risk to your portfolio.