What is the future outlook for markets?
In our recent open call for clients and contacts, we asked our US-based Chief Market Strategist, Tony Dwyer to share his views on the US election as we face probably the most complicated election ever imagined. Our Chief Investment Officer, Michel Perera provided an overview of global markets including developments in China, Europe and the UK, particularly as Brexit looms.
Given we are in extraordinary times, with the prevalence of COVID-19 accompanied by the most polarising and dramatic US election many of us have ever seen, this is one of those times when investors should be guided by what’s happening in the markets, as we outline below.
The US perspective
The sheer size of the US economy means it has a considerable influence on global markets and is an area we watch closely.
Upcoming US election
Despite the voting logistics and the vast differences between the candidates driving an unpredictable outcome, there is one certainty. No matter who wins, there's going to be a stimulus package that's going to have a focus on infrastructure. Both sides agree that this will ultimately help Industrials, Materials and the more cyclical market sectors.
Is the US driving a synchronised global recovery?
We’re in a very different environment to the market panic we saw in March, when we were faced with uncertainty, lockdowns looming and no experience of how this was going to impact the global economy. While experiencing a synchronised economic shutdown, we were also unsure how the Fed (Federal Reserve) or the US government were going to respond.
This time, while various areas of the global economy are seeing a pullback because of a second wave of COVID-19, looking at the wider environment, we seem to be in the midst of a synchronised global recovery. Undoubtedly, we are going to see increased volatility in the coming months, but with the Fed committed to printing money, there is plenty of excess liquidity to support economic activity and this is driving the markets.
If the US government continues to spend money and the Fed continues to keep interest rates low through ongoing quantitative easing, we’re very excited about the prospects for the next 5-10 years.
Where are the other opportunities for investors, beyond the US?
With the second-largest economy in the world, China has become a major factor in many markets. There are five key elements making China strong:
- As the biggest consumer and importer of industrial commodities, it totally dominates these markets
- Its huge foreign exchange reserves are by far the largest in the world, and these enable it to move currency markets
- It is increasingly providing an alternative to US technology, albeit this comes with some political baggage
- China is still the factory of the world; despite efforts from many western countries to replace the supply chains coming from China, these have barely budged
- Lastly, China is now not just a producer but also a consumer; it is a growing market for capital and consumer goods and hence it matters enormously to many companies all over the world.
The Chinese economy has recovered faster and higher than any other country. Indeed, most projections show that China will end up having positive growth this year, probably the only nation in the world to enjoy that privilege. Why? China has always been more manufacturing-focused than developed countries - and industry has recovered faster from COVID-19 than services.
Despite being where it all started, by the time the rest of the world was hit with the pandemic, China was already recovering.
Japan is a gold mine for bottom-up stock picking. It’s not just about robotics, automation or ceramics where Japan is a world leader, but more about those firms that are more efficient than any of their world competitors - and have more cash.
So far the FTSE is down 20% this year whereas the tech-laden NASDAQ index in the US is up more than 30%. The most important factor moving the UK economy right now is COVID-19 rather than Brexit. And while the Chancellor’s efforts to support companies are admirable, the virus has to be stopped for the economy to have a chance and we are lagging behind the rest of the world here.
Separately, trying to predict the possible impact on UK growth of a poor Brexit deal, a partial deal or no deal with the EU, is difficult. The services sector, which is 80% of the UK economy, is the one that has to be watched closely. Some companies will lose access to important markets and this may hit financial services in particular. We should remember that companies have had four years to prepare themselves for this day and the good businesses should be ready – the key is finding the right stocks to pick.
Look beyond individual countries and consider growth vs. value investing
The most topical question today is not about which country to invest in but about growth vs. value. This is determined by how expensive shares are and how fast their earnings grow. Cheap, slow-growing stocks are called ‘value’; expensive ones with higher growth rates are called ’growth‘.
Over the last 10 years, growth has beaten value hands-down, mostly thanks to technology.
Value sectors are extremely diverse: you have stable, low-growth sectors like utilities and consumer products; cyclical sectors like Materials, Energy and Industrials, which go up and down with the economy; and in the middle you have Banks. Normally value sectors do well when there is a strong economic recovery.
Our preference over the last few years has been for growth sectors, such as Information Technology and Healthcare. Our least favourite sectors have been Energy and Banks.
Should we change our preferences? A lot will depend on what happens in three weeks’ time in the US, but it is likely that regardless of the result, more stimulus spending will be forthcoming as we mentioned earlier. Nevertheless, we don’t think Technology will go away as the driver of equity returns given that businesses are now adapting to new systems, new habits and new trends.
The rise of ESG (environmental, social and governance)
More importantly, we think ESG factors will be important for investors, with the potential to produce good returns. Furthermore, we expect the massive infrastructure spend in the US will be environmentally-friendly, no matter who is President.
A favourite of ours for over a year, although its short-term moves are quite unpredictable. Ultimately when central banks are printing money in support of government spending, all currencies will devalue but gold will hold its value.
What are the key questions investors are asking us right now?
At Canaccord Genuity Wealth management the long-term well-being of our clients is our top priority and in these uncertain times, we think it is more important than ever to ensure that you have access to our investment experts. On our open call, we answered some of our clients’ specific questions.
Are there areas of the market which are at particular risk from a solvency event?
There are some areas of the market that are shut down for business even today, although we do not believe that these cause concern for the wider market. While it is a difficult environment for airlines, hospitality and travel related businesses, the good news is that governments are looking to take special measures for these sectors. Furthermore, the most impacted sectors aren't large within the wider market, and the cash flows from many other areas, particularly technology, remain very strong.
Quantitative easing (QE) – simply a free lunch?
We see that QE is something that isn’t going away - and this is both helped by, and helps maintain, historically very low interest rates. In the short term, we see this as not only a free lunch but a very necessary driver in kickstarting economies through the COVID-19 crisis. There are some issues which need addressing because very high levels of debt have been shown empirically to lower long-term growth rates, and we may get some policy mistakes like a return to austerity too quickly or significant tax rises which would impact the economy.
So although there are some risks, the current state of the world economy means this is not something that we should be worried about short-term.
What is the impact on the housing market?
At the moment house prices in the UK are at record high and the housing sector in the stock market is seeing a strong recovery in terms of its financial numbers.
The main concerns for the housing market are rising unemployment, the availability of mortgages (banks are tightening standards) and the changes the government had already planned for some of their support measures, such as Help-to-Buy, all of which may destabilise the market. There may be a threat to the lower end of the market from those factors as we move into 2021.
Similarly, at the higher end, by which we mean over £2m, there's always an impact from lower growth and worries over sterling.
Perversely in the middle, despite not having the impetus from people trading up from first time buyers, there is a strong possibility we'll see a more robust market and that's driven by professionals who very successfully managed to work from home during the crisis, some of whom are now looking for slightly larger houses because they want a study area, for example.
Will the oil majors be able to maintain reduced dividends in the future?
It's about the sustainability of their reduced dividends going forward. Both Shell and BP are looking to transform themselves over the next 10 years into decarbonised companies (currently they’re among the biggest contributors to carbon emissions). To achieve this, they need to invest a lot of money if they're going to become green power companies.
In the interim, they have both budgeted to be able to maintain their capital expenditure plans and sustain a slowly growing dividend from those reduced levels, so long as the crude oil price reaches somewhere between US$50 and US$60 dollar per barrel (currently it's at about US$40 to US$42). Our longer-term expectations are for the oil price to recover somewhat as economic growth recovers – meaning there is a good chance those rebased dividend plans will continue to be delivered.
Once the US election and Brexit are out of the way, there is little to stop markets from resuming their positive backdrop. The world will get better over time and things should look very different six months from now, as they do compared to six months ago. The focus should be on selecting the right investments rather than worrying about the trend. Our top themes are technology, ESG, healthcare, Japan, Europe, UK small-companies and gold. We think we're entering a period of volatility that should create extraordinary opportunity for our clients.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.