Reasons to be cheerful and fearful: Cautious optimism is the way forward

Investment Market update to Friday 21st August:

(Source: Dominion Funds)

Equity markets last week continued their upward trend, with the Nasdaq powering ahead to new all-time highs and the S&P 500 showing solid gains. Economic data continuing to suggest a bounce back in major economies from lockdown lows, supportive monetary and fiscal policy and continued progress on developing treatments and vaccines for COVID-19, are all supporting the positive sentiment in equity markets. There is a growing feeling that we are past the worst of this crisis. Evidence indicates that COVID-19 spreads seasonally, indicating that Northern Hemisphere countries (the bulk of the world economy) could face a ‘second wave’ in the winter. Despite great strides being made in fighting the pandemic, we are still some way off beating this disease. This risk remains high and something that should temper investor optimism. An economic bounce-back… of sorts: what is the data saying? US retail sales were up 1.2%, month-on-month (MoM) in July, missing the market’s expectation for an increase of 1.9%. However, retail figures for both June and July were up 1.9% year-on-year (YoY). This marks three straight months of improvement for US retail, and the emergence of a more normalised picture. Meanwhile, the University of Michigan’s Consumer Sentiment Index edged up to 72.8 in August 2020 from 72.5 in July, narrowly beating estimates of 72. In other US data, industrial production rose 3% MoM in July. This followed a 5.7% rise in June and was in-line with expectations. Manufacturing output rose 3.4%, beating forecasts, with the largest gain coming from motor vehicles and parts, which increased by 28.3%. Building permits jumped 18.8% in July to a seasonally adjusted rate of almost 1.5 million – well above expectations and the highest since January. The Eurozone’s trade surplus widened to €21 billion in June – much more than the market was expecting – but imports and exports both dropped (by 12.2% and 10%, respectively). While it looks like the worst is behind us in Europe, there is still no sign of a spectacular turnaround. However, the Bundesbank suggests that we will see a rapid and broad-based recovery in the German economy this year, as lockdown restrictions have been lifted. In China, recent data has been mixed. The country’s retail trade declined by 1.1% YoY in July – the seventh straight month of contraction. On the other hand, Chinese industrial output rose by 4.8% in July, while average new home prices rose at the slowest pace since May 2018 (4.8%) and real estate investments increased. China’s recovery is moving forward – and this is a clear and encouraging trend – but it’s not moving as fast as some commentators predicted.    As always talk to your adviser within the Just Service network if you would like information or otherwise review your savings, investment or pension plans. For all enquiries email info@justserviceglobal.com

Regards

The Just Service Client Service Team

All content provided is for informational purposes only. Just Service makes no representations as to the accuracy or completeness of any information contained or found by following any link. Just Service will not be liable for any errors or omissions in this information nor the availability of it. Just Service will not be liable for any losses, injuries, or damages from the display or use of this information. This policy is subject to change at any time.

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Investment Ideas for the Next 12 Months

The team at Just Service Global hope all clients using our service are staying safe and taking due care in such difficult times.

Positioning your portfolio for the risks and opportunities ahead

Source: International Adviser Publication

Four themes driving investment markets over the next 12 months: recession, low oil prices and yields, stimulus, recovery, and active edge.

For each of these themes, there are seen as three key investment ideas. The coronavirus outbreak prompted the fastest-ever bear market as the MSCI All Country World Index plummeted 33.6% from February 20 until March 23. Then, after stimulus was announced, the index rallied 27.8% to the end of April despite deteriorating economic data.. Investors now face some difficult questions. Is the recent stock market recovery sustainable, or is it merely a bear-market rally? Which investments are the likely winners and losers as the global economy recovers? And how should portfolios be positioned given there is so much uncertainty about the future? Our themes are based on how we believe the global economy will perform over time and the investment implications arising from that. For each theme, we offer three investment ideas. 1. Recession The global economy is expected to severely contract in the first half of 2020 at a magnitude not seen since the Great Depression in the 1930s, then either sharply expand in the second half of the year or recover more gradually into 2021. It is challenging to make money in recessions. Although money‑printing quantitative easing could be inflationary, inflation is unlikely to rise in the short term, not only because of the recession, but also because secular forces including low energy prices, demographics, and technology keep it low. Central banks have been struggling to lift inflation to meet their targets. Investment Theme No. 1: Recession

Some sectors are likely to continue to be winners. If the recovery stalls and lockdowns and social distancing remain in place for a longer period, technology may benefit, allowing for remote connectivity, online shopping, and cloud computing. This is on top of ongoing technology‑led disruption, where investors should be on the side of the disruptors, not the disrupted. If the coronavirus makes a comeback after the summer before a vaccine is developed, health care will remain critical.2.

2.  Low Oil Prices and Yields

Overshadowed by the coronavirus crisis, the other drama in 2020 has been the fall in the price of oil. The challenge with oil is not just the fall in demand—when was the last time you filled your car with fuel?—but also oversupply. A low price of oil typically means low inflation.

Bond yields are low and are likely to remain so for the next 12 months. Low yields make it harder for banks to make a profit. Growth stocks in the U.S. may continue to outperform value stocks because 40% of the Russell 1000 Growth Index is technology while 20% of the Russell 1000 Value Index is financials and 5% is energy (0% in the Russell 1000 Growth Index).2 Low oil prices and low yields mean there will be some losers and some winners.

Investment Theme No. 2: Low Oil Prices and Yields

3. Stimulus

The unprecedented amount of stimulus injected into the global economy over the past few months has offered a lifeline for individuals, businesses, and economies. While policymakers may have kicked the can down the road, leaving themselves with a mountain of public debt and possibly inflation to deal with another day, the situation would have been much worse without the stimulus they provided.

Investment Theme No. 3: Stimulus

Policymakers are all in—they are unlikely to be able to reverse their policies until the economy finds a strong footing. These policies have created both challenges and opportunities for investors. The three investment ideas here focus on (1) yield scarcity—when cash and government bonds yield close to nothing, (2) piggybacking central banks—buy what they buy, and (3) risk assets—in a flood, everything floats.

4. Recovery

Crises typically go through three phases: meltdown, bear-market rally, and recovery. The meltdown is behind us. However, it is unclear whether the rebound of risk assets from their March lows is a dead cat bounce, meaning markets are likely to go through periods of significant ups and downs, or a sustainable recovery.

Investment Theme No. 4: Recovery

For the recovery to be sustainable, markets needed three things: (1) the peak infection rate to have passed, (2) a convincing and aggressive monetary and fiscal stimulus, and (3) receding volatility. Although all three are in place, many unknowns linger: a risk of a second wave of infections, the ability of a scarred economy to recover, and the pace of returning to a new version of normality. One scenario is for a steep and strong economic recovery in the second half of 2020; another is for a gradual recovery into 2021. One thing is sure: The crisis will end, and a recovery will begin.

The three investment ideas here are (1) diversification—true diversification, not perceived diversification, as some assets (e.g., corporate bonds, commodities) might exhibit low correlation with equities in good times but high correlation in bad times; (2) balancing offense and defense; and (3) flexibility—portfolios must be nimble, ready to adjust.

As always talk to your adviser within the Just Service network if you would like information or otherwise review your savings, investment or pension plans.

For all enquiries email info@justserviceglobal.com

Regards

The Just Service Client Service Team

All content provided is for informational purposes only. Just Service makes no representations as to the accuracy or completeness of any information contained or found by following any link. Just Service will not be liable for any errors or omissions in this information nor the availability of it. Just Service will not be liable for any losses, injuries, or damages from the display or use of this information. This policy is subject to change at any time.

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Reasons to be optimistic with investment markets

The team at Just Service Global hope all clients using our service are staying safe and taking due care in such difficult times.

Source: Momentum/Harmony fund managers

1. Coronavirus will pass, whereas fiscal and monetary stimulus will be long-lasting.

Bond yields are likely to remain low for many years from now, with base rates at all time lows. Governments worldwide are increasing expenditure to extreme levels that have historically only occurred at times of war, representing 10% of GDP in the US and as much as 20% in the UK, with more likely to come.

These stimulus measures will ripple through the global economy for years to come, driving a strong growth recovery once coronavirus is beaten, while reducing the risks of widespread corporate defaults and supporting higher valuation multiples for equity markets.

2. The best returns tend to come from the point of greatest pessimism.

As Warren Buffet famously said, investors should be “fearful when others are greedy and greedy when others are fearful.” One must remember that the value of an equity stake in a business is the present value of all future cash flows, not just those over the next few months.

The best rolling ten-year equity market returns, measured by the Dow Jones Industrial Average index, have come from the times when all hope seemed lost.

Investors buying equities at these points – including at the end of WW1 and WW2, at the depth of the great crashes of 1932 and 2009, and after Black Monday in 1987 – benefited from 10 year annualised returns of 10-15% per annum.

3. Markets will recover long before the economic and humanitarian crisis is over

Financial markets always move to reflect a change in the outlook for economies and corporate profitability well ahead of the fundamentals actually reflecting that.

This ‘lead’ effect means that declines in global growth and corporate earnings, as well as a rise in defaults, are already very much ‘priced in’ at this point.

Markets are already discounting much of the grim news which bombards us daily and, while the news flow is unlikely to improve for some time, they will almost certainly begin to recover well before the worst of the economic and humanitarian impact is felt.

4. For those making regular savings, or with additional reserves to invest, lower valuations mean more shares/units can be acquired for any given cost. This ‘dollar cost averaging’ effect creates greater value over the long run.

Market outlook: where to invest - and where to avoid!

Source: Just Service Global

The recovery could be fairly swift and a lasting positive impact on e-commerce, lifestyle brands that support social distancing and remote working (like tele-meetings)  

Losers

The biggest losing sector so far this year is the energy at 68% (energy demand and glut of oil  - crude oil prices have fallen dramatically)

Others on the losing end:

- gas and consumer fuels 

- airlines, travel, automobiles, hotels, restaurants and leisure

- financial services

Where to invest now

- Utilities are expected to be resilient as they provide essential services to the community

- Technology sector - with a greater embrace of remote technologies (good for the big tech providers).

- 5G Technology: the coronavirus contagion is reinforcing the importance of the ultrafast 5G technology, the next generation of wireless. 5G announces the capabilities of the Internet of things and home gadgets.

 - Alternatives: The main categories of alternatives

1. Hedge fund investments. Through those who pursue a number of specialist strategies

2. Private equity funds investing directly in to private companies or investments or engage in buyouts of existing companies

3. Real estate This liquid but measures such as student housing data centres, infrastructure and toll booths very appealing

4. Credit: any credit that is not traditional. For example, collateralized loan obligations or the direct lending industry

5. Commodity traded advisors (CTA) trend following strategies that buy and sell season markets depending on momentum and volatility

Today alternatives are becoming more popular to retail investors.  This is not surprising given markets are becoming harder to navigate with opportunities becoming more difficult when you are seeking low volatility, enhance returns and an increase in overall diversification. All risks should be clearly explained and documented by the financial advisor offering “alternatives”

In the current market alternatives could populate approximately 25% of portfolios.

For all enquiries email info@justserviceglobal.com

Regards

Phil Neilson

Managing Director

All content provided is for informational purposes only. Just Service makes no representations as to the accuracy or completeness of any information contained or found by following any link. Just Service will not be liable for any errors or omissions in this information nor the availability of it. Just Service will not be liable for any losses, injuries, or damages from the display or use of this information. This policy is subject to change at any time.

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