Calm Ana (anagram)
Most of us are working from home and in our down time (if you’re not home schooling), you might have time for another activity.
Crosswords are popular and within them are the odd anagram. Hopefully, you may have worked out that the title’s letters also spell almanac. At the start of each year, there are a set of forecasts, key events and dates to watch out for – an almanac.
At the midway point of January, you may well have had numerous ‘2021 Outlook’ emails or webinar invitations from the larger investment providers often professing a liking for a particular asset class. Indeed, many snappy one-liner quotes appear in the trade press emails along the lines of ‘why I’m choosing emerging market debt’.
As your inbox has probably had many of these, we will not add to that cluster but the familiar quoting of inappropriate, convenient labels and whether a strategist is over or underweighting a country, prompts me to remind investors to look beyond the institutional quotes competing for space in your email inbox.
Fixed income isn’t fixed, it’s often floating, can be zero or negative and this alternative asset class to equity should be referred to as debt. Imploring investors not constrained by being too big to segregate their exposure to debt by investment grade, high yield and emerging market debt is folly. Those institutional type constraints promote products to match but the most fertile area of the debt world is in the lower end of investment grade and higher end of high yield, often referred to as ‘crossover’.
Basically, avoid those ‘fallen angels’ exiting or about to be downgraded from investment grade but hold those ‘rising stars’ who have the ability to be upgraded from high yield to investment grade. Some strategic bond funds offer a solution to the debt allocation conundrum but many allocate to high yield to access the ‘carry’ of a more attractive yield to entice investors.
In equity, is being under or overweight a country or region’s index relevant to non-institutional investors? We would argue it is not. Attempting to ascertain which geography has the best potential growth rate is often the rage at this time of year but identifying long-term trends in demand is a much better way of equity allocation in our view and more logical. While thematic investing has been given a boost in 2020, index-referenced investing still holds sway for most investors – not T. Bailey though.
Alternatives are frequently treated as a bucket into which any asset other than debt or equity gets put. However, most are quite different from each other in terms of volatility, liquidity and performance expectation. They should be treated as being different from each other not lumped together.
Time to jump down from the soapbox.
Knowns not Forecasts
What do we know?
Monetary policy will stay loose even if inflation picks up above target. This one-dimensional approach to ensure economic stability/recovery has its downside as it can fuel asset appreciation and attract leverage leading to high valuations. Those that have financial assets do well while those that don’t see little positive change to their lifestyle.
Fiscal policy will pick up the slack and will attempt to bridge an inequality gap that has increased in recent years. Is dealing with inequality a theme in itself or part of the ESG thematic trend that is attracting significant assets?
Biden has overcome Trump and will attempt to deal with inequality in the US. Securing a narrow advantage in the Senate will prompt more stimulus but the slender margin of the majority, which requires the casting vote of Vice-President Kamala Harris, will keep the more radical democrats at bay.
Vaccines are perceived to trump rising Covid-19 infections and enable investors to look beyond this spring.
Bond or debt investing has little appeal. Without central bank support, where would ten year US Treasuries or ten-year gilts be yielding? At least 1% higher probably, but that support isn’t evaporating and investing in sub-inflation assets has no appeal. Debt remains a borrower’s market.
The backdrop is positive for equities but that is a consensus view and good news on earnings is baked into many equity prices.
Rotation has become a well-used word since early November. The early news of a high-efficacy vaccine prompted a boost to so-called value stocks. US banks have done well since then and were further boosted by the Democrats winning of two Georgia Senate seats to gain control of the Senate. Such stocks may be recovering from a poor period of performance, but as we have noted previously, we will not be investing in low margin, leveraged businesses. Similarly, we will not be investing in oil as neither fossil fuels nor traditional banking are considered to be long-term demand themes.
So, in summary, the focus remains on sustainable (pun intended) long-term demand trends and equities exposed to them. We keep a weather-eye on valuations to avoid exposure to the eye-watering valuations of a number of stocks which are more prevalent in the US.
Activity & Positioning
Not much has changed in either fund in the first half of January, cash from inflows has been allowed to increase the cash weighting in Dynamic as markets digest the virus’s impact, vaccine roll-outs and political developments. We have two interesting funds that are likely to appear in both funds in the second half of January, subject to compliance checks.
Thank you once more for your continued support, we hope you manage to keep physically and mentally well and safe during this lockdown. T. Bailey continues to function normally, if remotely, as it has done since March 2020 so we are able to manage your clients’ assets without disruption.