Mid Monthly update – November 2020
November 2020 Mid-Monthly Update
In a year when the word ‘unprecedented’ has been used an unprecedented number of times, the first half of November was full of volatility-inducing news. So much so, that Brexit barely got a look-in. What was unprecedented and noteworthy was the news of a vaccine developed by Pfizer and BioNTech for Covid-19 with 90% efficacy within a year of the outbreak. The speed of that development took investors by surprise on the morning of 9 November, eliciting a sharp upward move in the share prices of companies exposed to the broader economy. All this, hot on the heels of a messy US Presidential election which has eventually seen Democrat Joe Biden become President-elect, the 46th person to hold that office, despite Donald Trump’s protestations.
Amidst all the news, Sean Connery, probably the most popular James Bond, passed away in the Bahamas aged 90. However, the bond villains I’m alluding to aren’t Blofeld et al but are the oscillating government bond yields depicted in the chart below from TradingView. The sharp movements in the US ten-year Treasury bond over the past month and especially since the start of November, have reflected concerns over a ‘blue wave’ where Democrats took control of both the House of Representatives and the Senate, resulting in a huge stimulus and increased borrowing. While that is still possible, it is unlikely. Then at the start of last week, the announcement of an effective vaccine prompted expectations that a return to ‘normality’ in 2021 would see a rise in bond yields to reflect increased inflation concerns.
The ten-year US Treasury yield, which was as low as 0.51% in early August, almost doubled in yield before ending the week at 0.90%. The almost doubling of yield has given those bond holders quite a capital hit/loss over the past three months. Ten-year UK gilt yields oscillated in similar fashion. Ten-year bond yields provide a valuation yardstick for growth equities which, unsurprisingly, have struggled over the past month.
A Shot in the Arm
The vaccine announcement proved to be a shot in the arm for so-called ‘value’ investors. The prospect of an earlier than anticipated vaccine, and the surprise timing of the announcement, kick-started a resurgence in the share prices of companies exposed to a broader economic recovery and expectations of a return to some form of normality in the first half of 2021.
None of the themes we invest in for you and your clients involve capital and/or labour-intensive businesses dependant on high volumes multiplying low margins, often with plenty of debt. Sure, these companies will have their moments in the sun like last Monday when some form of euphoria caused some of those stocks to rise 30-40%. However, with some having fallen up to 70% this year, could this be a ‘dead-cat’ bounce for companies that are still down a lot this year? Airlines, banks and retail businesses without a significant online presence may well continue to bounce but we are not here to capture recoveries of troubled sectors nor trade them.
A number of digital economy winners gave up ground but not all growth companies are on high multiples, dependant on future growth. Many have subscription models with pricing power, a low-cost base and the ability to generate substantial free cash flow. The traditional ‘value’ versus ‘growth’ argument will occupy industry journals’ column inches but it is not a discussion topic for us.
What continues to occupy our thought processes are sustainability, responsible investing and what you might call values investing. Knowing that your investment has a value to society seems more relevant than getting caught in a ‘value’ trap. Buying an oil company because its share price has fallen too far in the short time has little to no value to us.
Our belief is that companies with good governance, strong financials and are within our long-term themes, will reward investors over time.