Stimulus, inflation, rotation

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This time last year, the world outside my window looked much the same but it was a different place. We were just getting to grips with dramatic changes in our lives. Like many other people, I had just started working from home, obviously with no idea that in 12 months’ time I would be looking out at the same Magnolia tree coming into blossom, seated at the same desk, writing another April Investment Outlook report - and still stuck at home. I’m glad I didn’t know what lay ahead.

In investment terms, too, it has been an extraordinary period. The V-shaped recovery from last spring’s market plunge has been unprecedented. Obviously, we hoped a year ago that the market fall in February and March had been overdone. With 98% of shares below their 50-day moving average, that looked likely. But no-one really foresaw the speed and scale of the bounce - by May, more than 90% of shares were back above that 50-day average. In market terms, it was all done and dusted in three months.

The turning point for markets was coincidentally the day that Britain belatedly went into lockdown - the 23rd March. More importantly from a market perspective, that was the day that the Federal Reserve said it would buy unlimited amounts of Treasury bonds and, for the first time, corporate bonds too. It was America’s ‘whatever it takes’ moment. Governments quickly joined forces with central banks, adding fiscal to monetary stimulus. Markets have done what they have in the past year largely because of extraordinarily bold policy decisions.

There is a market adage that warns against trying to fight the Fed. How much more true the saying is when the Fed and the world’s most powerful governments and central banks are acting in concert. You have to go back to the Second World War to witness a similar combination of fiscal and monetary stimulus. Government spending supported by a compliant central bank is a potent cocktail.

The election of Joe Biden in November, and the Democrat sweep in Congress, has enabled a sea-change in economic policy. Add to that the remarkable achievement of the world’s scientists in quickly creating viable vaccines and (in the US and UK at least) a successful vaccination programme. Throw into the mix the remarkable adaptability of people to change and the optimism in markets this past year starts to make sense.

UK and US lead the vaccine race

Number of vaccines administered per 100 inhabitants

Source: Refinitiv, 29.3.21, data includes first and second doses

The US is driving the recovery from Covid just as Chinese investment fuelled the recovery from the financial crisis 12 years ago. Including the latest $1.9trn American Rescue Plan, with its $1,400 cheques to most households, the US will have deployed five relief packages since March 2020. In total America will have spent $5.6trn, or 26% of GDP. The White House is likely to follow with another $2-3trn of infrastructure spending. In total, perhaps $8.5trn.

There are, however, no free lunches. Governments and central banks are almost unrestricted in what they can do. But not quite. The bond vigilantes have saddled up in recent weeks and they are looking to hold the authorities to account. Bond yields remain low by historic standards, but they are telling us that you cannot run the printing presses with impunity. It took years for the financial repression of the post-war period to morph into the inflation of the 1970s, and it took the addition of an oil crisis, the Vietnam war and the rise of trade union power, but the reckoning did arrive in due course. It is hard to imagine that there will not be a price to pay at some point.

But history also offers hope. The bull market which began in March 2009 may feel long in the tooth, but the post-war period has given us much longer rallies - from 1949 to 1968 and again between 1982 and 2000. These periods of nearly 20 years each delivered annualised gains of 18% with relatively short pauses for breath along the way. The current bull market is both shorter than the average secular upswing and it has risen less far. Perhaps most importantly, valuations, while above average, are not yet excessive.

Another interesting parallel with these earlier bull markets, is the change in sector and style leadership which occurred about half-way through the previous cycles and which looks to be repeating itself today. The rotation from growth to value, from large to small, from defensive to cyclical is typical of a growth-fuelled secular bull market.

We need to remain nimble. Last year’s winners will not necessarily repeat the trick in a new reflationary upswing. The technology shares which have prospered in an environment of low growth and low interest rates will not necessarily lead the pack in a higher growth world. As the chart below shows, the last three months has seen a dramatic divergence between investment styles.  Diversification, by geography, by asset class and by sector and style has never been more important.

Value finally starts to outperform


Source: Refinitiv, 31.3.21. Rebased to 100 at 30.9.20, total returns in USD

%
(as at 31 Mar)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
S&P 500 Growth 15.5 19.7 12.8 -2.5 59.4
S&P 500 Value 18.7 7.7 5.9 -12.2 50.4

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

Fund picks review

If we are indeed experiencing a watershed in markets, then picking the right funds will matter. When I put together ‘Tom’s Picks’ in December it was against a fast-changing backdrop. I wanted to make sure we were not left out on the wrong side of a leadership shift. I deliberately chose a diversified set of funds focused on three themes - sustainability, income and what I expected to be a better year for the UK.

Before reminding ourselves of this year’s picks, however, I want to look a bit further back. My picks are not made with a year’s performance in mind but with a longer-term perspective, so this quarter I’m going to reflect on how the picks from the past few years have performed. I still hold all of these in my own portfolio and I’m guessing some of you will too.

Four years ago, at the start of 2017, I was looking for geographic diversification and found it, albeit with a US bias as my global fund pick was weighted towards the world’s biggest market. History has dealt kindly with that decision. Of the four picks I made then, what is now called the Jupiter Merian North American Equity Fund (up 41%) and the Rathbone Global Opportunities Fund (up 84%) have easily outpaced my Japanese pick (Schroder Tokyo, up 22%) and the UK choice (Fidelity Special Situations, up 13%).

Overall, however, the four picks have shown that buying and holding is a sensible approach. Only Special Sits has spent a meaningful amount of time below the initial purchase price and waiting for the rotation back to value has paid off.

Fund picks 2017


Source: Morningstar, 31.3.21 bid to bid with income reinvested in GBP terms. Excludes initial charge. Figures rebased to 100 on the chart as at 1.1.17

%
(as at 31 Mar)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Rathbone Global Opportunities 24.8 11.7 13.9 3.6 39.5
Fidelity Special Situations 21.5 4.4 1.2 -27.8 46.7
Jupiter Merian North American Equity 39.6 1.0 12.8 -6.2 44.7
Schroder Tokyo 36.8 5.9 -4.9 -6.7 23.6

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets.

Moving on 12 months to the start of 2018, I limited myself to three fund picks. Again, the emphasis was on geographical diversification, leading me to fund choices for Asia, Europe and a global pick.

Fidelity Global Special Situations Fund has led the pack from 2018 to date, with Jeremy Podger’s fund rising 41% over that period. The Jupiter Merian Asia Pacific Fund took some time to get going but has excelled in the past year to be 22% up. Equity income has struggled, and the Invesco European Equity Income Fund is up just 2% in three years.

The 2019 picks have experienced an interesting two-year run. The first year started from a low base and was a good period in the markets. Fourteen months in, the four picks from that year endured the horror of last year’s pandemic plunge but then picked up the baton again for the past 12 months.

Overall, I’m pretty happy with the performance of Lindsell Train UK Equity (up 19%), Fidelity Global Dividend (30% higher), Baillie Gifford Japanese (with a 47% gain) and Fidelity Select 50 Balanced (which has risen 19% in just over two years).

Fund picks 2019


Source: Morningstar, 31.3.21 bid to bid with income reinvested in GBP terms. Excludes initial charge. Figures rebased to 100 on the chart as at 1.1.19

%
(as at 31 Mar)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Lindsell Train UK Equity 15.7 8.4 12.9 -5.8 15.3
Fidelity Global Dividend 23.6 -4.5 15.3 1.5 21.4
Baillie Gifford Japanese 44.2 15.4 -1.1 -8.7 43.5
Fidelity Select 50 Balanced - - 4.4 -5.1 19.8

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets.

Which brings me to last year’s picks. Again, putting your eggs in more than one basket was clearly beneficial. The worst performer (and in fact the only one of the past four years’ picks to be under water) is the Liontrust UK Growth Fund (which has fallen 8% in 15 months). The other three picks from last year have recovered the lost ground from a year ago and are ahead of where they started the year. The Fidelity Select 50 Balanced Fund (a repeat pick in 2020) is up 6%. Fidelity Global Dividend (also retaining its place in the picks) has risen 9%. Artemis Global Emerging Markets, a slow starter, is now 10% ahead of where it started last year.

Now, to summarise this year’s five picks. The Brown Advisory US Sustainable Growth Fund looks for companies with a sustainable business advantage. It is a relatively concentrated portfolio, chosen with a firm valuation discipline. A similar sustainable approach, with a focus on companies demonstrating a high degree of ‘social usefulness’ is the Stewart Investors Asia Pacific Leaders Sustainability Fund. The fund has a long track record of investing sustainably and sticks to large and mid-cap companies.

The second theme is income, something that will continue to be important to investors as central banks remain accommodative for the foreseeable future. The Foresight UK Infrastructure Income Fund aims for a 5% income stream (not guaranteed) and has a sustainable tilt too because it invests in renewable energy.

The third theme, a recovering UK, is played via two fund picks this year. Fidelity Special Situations Fund makes a return visit, which I believe will be better timed than its last outing in 2017. This is a pure value play, looking for companies entering a period of positive change that’s not yet reflected in their market price. The Fidelity UK Select Fund is the growth option that will perform relatively better if the recovery is less exciting than we hope.

%
(as at 31 Mar)
2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Fidelity Global Special Situations 36.6 4.5 6.3 -4.3 45.7
Jupiter Merian Asia Pacific 43.3 16.5 -1.8 -11.7 53.0
Invesco European Equity Income 33.4 3.9 -3.9 -22.7 47.8
Liontrust UK Growth 23.2 2.6 7.2 -14.0 22.6
Artemis Global Emerging Markets 41.8 11.5 0.2 -17.1 41.3

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets. 

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