Q4 – October 2021 Marketing Commentary
Market Commentary - in conjunction with MAIA Asset Managment
The summer months have come and gone but provided investors with a lot to think about as we move into the final quarter of the year. As is normally the case, trading volumes were quieter during the third quarter. Many investors looked to utilise the loosening of travel restrictions to get away from their desks for a well-earned break.
Despite lower investment volumes, news flow was abundant. The quarter provided much to consider, regarding both the short- and long-term implications of the changing investment landscape. The COVID-19 pandemic continues to dominate all aspects of the global economy but as vaccination rates increase apace this has led to economies being able to reopen. Monetary stimulus packages have been evolving and direct government stimulus to businesses and workers has been reduced and, in some instances, removed completely.
Globally, governments continue to focus on long-term fiscal plans, improving infrastructure, social care, healthcare, and creating better working conditions to allow for higher productivity. There is a requirement for this along with continued spending on improving environmental needs and reducing social inequality. In this vein the US are currently looking to pass President Biden’s infrastructure and care bill.
In the UK, a boost in healthcare and education spending has already been promised, alongside social welfare and care reforms for the future. In Europe, the EU are continuing with their recovery spending plan, focusing a large chunk of this in projects that ‘do no harm’. We believe these spending pledges will continue moving forward, as fiscal stimulus looks to help boost economies alongside the monetary stimulus that has been in place for several years.
With the long-term need to invest in climate initiatives to reduce emissions, further spending is essential. With the upcoming UN COP26 climate change meeting in Glasgow, governments will be in the spotlight and will have to show how they will act together, to reduce carbon emissions to hit net zero targets by 2050 at the latest.
The main issue for investors regarding this increased fiscal spending is how the extra funding will be created. Tax rises have been highlighted to help fund some of this. The UK has been the first to move with a hike in national insurance contributions for all being brought in to help cover a health and social care package. The US will soon be following suit. The issue with tax rises is the effect this will have on longer term growth prospects as incomes, spending and productivity may reduce if taxes are raised too quickly.
Alongside the focus on governments and fiscal spending, there were several central bank meetings in the quarter for developed countries. All central banks are focusing on the transitory nature of inflation and whether growth prospects continue to boost productivity moving out of the COVID pandemic. The heads of each Central Bank emphasised the need for a gradual return to more normalised conditions. This led to a slight pick-up in volatility as markets tried to price in future decisions for monetary tightening. Tapering looks to be priced in and investors are now grappling with interest rate hikes in the coming years. This shouldn’t provide too much of an issue for markets though as any interest rate rises indicate improvement in the investment landscape and underlying economies.
Asset Allocation
With markets continuing to be impacted by sentiment as well as economic factors, investing for the long term is key to allow for good risk adjusted returns. Alongside a long-term view, the main investment thesis within all our portfolios is the continuation to blend assets. This is through styles, size, asset classes and themes.
One of the main themes we continue to favour is to blend from a style perspective and invest not just in growth or value but blend both aspects together. Within our value holdings, the team have focused on the long-term opportunities of investing in dividend paying companies. Dividends were cut quickly during the COVID-19 pandemic, as economies were shut, and many businesses weren’t generating sufficient earnings meaning that there were no excess funds to pay out for dividends.
Over the past three quarters, as economies have begun to reopen, the dividend picture has dramatically changed. Businesses have been moving back to full capacity, earnings are improving and so cash rich businesses are looking to implement dividends again for shareholders. It is even more apparent that many of these companies are undervalued from a growth perspective, especially considering the income generation and pay out profiles for the coming years. So, in the value space we have tilted our exposure to dividends as well as value to take advantage of the current favourable pricing in these companies.
The use of Alternatives
Another major theme that runs through all our portfolios is the utilisation of alternatives to generate alpha. We continue to favour alternatives as they provide broad diversification outside the usual asset classes which helps to dampen volatility and provides returns from different sources. With fixed income continuing to be challenging, alternatives provide a good hedge to volatility in equities. Two of these alternatives utilised within our portfolios are defined returns and gold. Below we set out our on-going views of investing in these two alternative asset classes:
Defined Returns
The defined return funds aim to generate medium to long-term growth in rising, flat or modestly falling equity markets. The underlying investments held within these funds have a set target return, and a defined level that its index needs to be equal to, or above, in order for this return to be paid out. The defined return funds that we invest in currently have an average buffer of 30%, which means that the market would have to fall by more than 30% and remain at that level until the target date for the return not to be met. The defensive nature of these investments means that if the market were to see significant growth from its current level the funds will still only meet the targeted return, and hence the returns from the benchmark would be higher. Our view is that the defined return targeted is sufficient reward for this portion of our model.
Gold
Gold is a defensive asset, used to diversify the portfolio and act as a hedge against short term economic downturns and political uncertainty. It can be described as a fear asset, and hence whilst uncertainties remain in the market, we believe gold remains a good diversifier within our portfolios. Gold is seen as a safe-haven asset that can preserve or even grow in value when other assets are struggling. Traditionally gold and precious metals have been held as a hedge against inflation, and whilst our view is that inflation may be transitory, if we were to see a rise in inflation this asset class should preserve its relative value.
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