Off to the Races
On Tuesday, the Cheltenham National Hunt horse racing festival starts: a four-day event that this year will be watched by a television audience only.
At this point in 2020, the corresponding fixture had finished on Friday, March 13th. Quite how that event was allowed to take place in front of packed crowds, is hard to understand. A quarter of a million people attended what was to be the last large-scale UK sporting event in terms of crowds. Inevitably, it was a super-spreader event and probably caused a number of lives to be lost – staggering.
The following week saw financial market dislocation as a lack of liquidity was reflected in even the most liquid markets – foreign exchange and government bonds.
It was midway through that week that the team at TBAM started working from home, a tried and tested operation and one that has worked seamlessly for the past year, although it doesn’t feel like that long. It has been an interesting process with some good lessons learned along the way. I believe we have become more efficient users of time for example.
With the impressive vaccination rollout continuing apace and some brighter days, the onset of spring has caused some cheer, not least among those who have been rejoicing that their children are back at school.
Investors could be forgiven for thinking government bond yields on both sides of the Atlantic are off to the races. The following chart, courtesy of Investing.com, illustrates the rise in ten-year UK government bond (gilt) yields over the three months to last Friday, March 12th. After a brief but short-lived rally, yields are back to last month-end levels and volatility is up too.
In early January this year, ten-year gilts yielded sub 0.20%. In the ensuing two and a half months, they have more than quadrupled to over 0.80% which also represents a significant capital loss to holders.
Any asset that changes price and yield that much and that quickly is often viewed as a buying opportunity. But, as we said in our recent blog, ‘Inflation‘ bonds are still a borrower’s market as borrowing costs, at least for the government, are below the Bank of England’s target inflation rate of 2%.
Indeed, there will be a lot of borrowing to come from many governments to fund their economic support programmes. The UK’s Chancellor of the Exchequer, Rishi Sunak said as much in his budget statement on March 3rd. Last week, US President Joe Biden managed to get his $1.86 trillion stimulus package through the US Congress. Yes, there is a lot of borrowing to come from the UK and US Treasury.
While both UK and US central banks will be buyers of some of their government’s debt, markets are nervous that supply will exceed demand at the same time as inflation ticks up due to favourable references to the second quarter of last year. In the US, the positive impact of the latest, substantial stimulus package is forecast by a number of economists, to add an extra 3% to US Gross Domestic Product (GDP) this year, with 2021 GDP growth of 6% to 7%, the fastest for decades.
Central banks continue to focus on reducing unemployment and have not expressed concerns about a resurgence of inflation, other than its expected short-term bounce.
A Rising Tide
Since the 9 November 2020 announcement of an efficient vaccine for Covid-19, beneficiaries of a widespread economic recovery have performed well. President Biden’s successful passing of last week’s stimulus package has helped that tide turn into a friendly tsunami floating all boats.
Some of those stock price rebounders are good businesses, others will struggle post stimulus and this year’s growth spurt. We continue to avoid businesses and industries reliant on high sales volumes on thin margins and those that are labour and/or capital intensive.
We have trimmed a number of equity winners that have been major contributors to the past year’s performance in favour of more specific themes surrounding health innovation and environmental opportunities.
We continue to uncover new strategies that fit with a sharper focus on the future thematic winners. This is similar to last March’s focus on the digital economy which had a positive impact of relative and absolute performance over the past twelve months.
While digitalisation is still a key theme going forward, some lofty valuations have led us to trim there.
We greatly appreciate your support and hope you are safe and well.