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Over the Q4 period, markets appreciated with the approval of the vaccines and subsequent roll out program across the UK. The increase in positive consumer sentiment allowed the UK market to perform well into the year end. The economic picture remains mixed with some areas showing an expansion, such as manufacturing and services continuing to grow following the beginning of their recoveries from earlier in the year. Yet, at the same time, an uptick in unemployment and slowing growth gave rise for caution. Support continues to be given both from central banks and governments across the globe to help with the economic impact of Covid-19.
Over the quarter, the top performing geographic areas have been the Asian region with the MSCI (Morgan Stanley Capital International) All Countries Asia Index (Ex Japan) up 12.2% and MSCI Emerging Markets up 13.2% as economies continue to return to normal following very early restrictions around the virus. As risk appetite increased, the US dollar weakened which also helped these regions to perform well. In the West, markets were given a boost by the announcement of a second vaccine. This progress allowed some rotation into smaller companies and the more cyclical areas of the market. Looking ahead, should economies continue to reopen more fully in 2021 we may see further rotation in markets.
Within fixed income, returns in corporate bonds remained more favourable to the return on Government Bonds. The IBoxx UK Corporate Bond index rose by 3.9% over the period. While the Barclays Global High Yield index rose by 1.8% and the IBoxx UK Gilt All Maturities rose by 0.5%.
In other assets, most property funds continued to reopen as valuers removed the material uncertainty, where they had been unable to value the properties within certain sectors. Some funds remain suspended, where they are carefully balancing cash flow requirements and not being forced to sell property at lower prices than they are worth, which is detrimental to existing holders.
|Equity & Fixed Income Market Returns
|FTSE ALl Share
|MSCI Europe ex UK
|Japan – Topix
|MSCI AC Asia ex Japan Equities
|MSCI Emerging Market Equities
|IBoxx UK Gilts – All Maturities
|IBoxx UK Corporate Grade Bonds
|Barclays Global High Yield Bonds
Total Return (£), Cumulative Source: Financial Express Analytics 31/12/2020
Equity markets have provided a strong return due to a combination of central bank and government support and investor appetite. As a greater number of economies have reopened and eased restrictions some of the more cyclical areas have rebounded. This has also been evident following the vaccine announcements.
Both governments and central banks globally have continued to provide a level of support which has aided markets. At present some of the job support packages may end without a replacement, which is giving some concern. In the UK, the furlough scheme has been extended to the end of March 2021 and further support for the self-employed has been announced.
US markets gained in Q4 with the S&P 500 index rising by 5.9%. The economy continued to recover as the US consumer gained confidence and remained active despite the withdrawal of support packages in July. The FED continued to remain supportive of markets with a view to keeping rates low until potentially 2023. Victory for Joe Biden in the US Election was well received in the markets and, given the current economic situation, it’s unlikely there will be any dramatic changes in the short term. The more consumer facing sectors benefited from increased discretionary spending on food and leisure.
In Europe, markets again had a positive quarter with the MSCI Europe ex UK index rising by 9.0% again boosted by vaccine news and further central banks support. There was some tightening of restrictions in some countries within the region. This impacted on several economies in the short term before a further support from the European Central Bank was announced. The EU leaders agreed a €1.8 trillion budget package, which included the €750 billion recovery fund aimed at helping the countries most affected by the pandemic. In addition, a Brexit trade deal was reached with the UK, which helped to clear some of the uncertainty that would otherwise have impacted across the region.
In the UK, markets rose by 12.6% over Q4 due to a combination of vaccine announcements and a Brexit agreement being reached. Some of the more cyclical sectors made up some of the losses from earlier in the year as the potential earnings could become stronger as economies open up. The more domestically focused areas benefitted through the upward market movements as economies looked at greater normalisation. Brexit talks reached a conclusion and a deal was agreed at the end of December with some areas being concluded such as zero tariffs and in other areas ongoing discussion will remain. While we can’t forecast the impact there no doubt will be winners and losers with the deal and we will closely continue to actively engage the fund managers as the new environment evolves.
In Asia, the index had a strong return of 12.2% with South Korea and Taiwan performing particularly well, aided by strong gains from the technology sector. The ongoing tensions with the US weighed on sentiment in this region although the domestic consumer continues to drive returns. Further, the area benefited from a weaker dollar as exports picked up on increasing global activity.
During the quarter and following the announcement of vaccines there was a rotation out of some of the growth companies that have done well and into the more undervalued business where expectation of earnings has changed following the news. Some of the sectors that had struggled throughout the year had a strong rebound areas such as Oil, Banks and Telecoms. Higher growth areas such as IT, Consumer Services and Consumer Discretionary lagged during this time. Careful analysis of the sectors and companies remains key within the portfolios and a careful balance remains important given the ever changing economic backdrop and the varying coronavirus impacts.
The chart below shows the performance of the MSCI ACWI Growth & MSCI ACWI Value Indexes over the quarter showing the impact of the change in equity style returns following the vaccine news over the quarter reversing some of the divergence in performance over the year.
Central Banks have continued to loosen monetary policy by keeping interest rates low and providing stimulus measures to help the economy through this period. The FED kept rates at 0.25% over the quarter and indicated to the markets that rates could be at these levels until 2023. In addition to providing further monetary support, the FED Chairman suggested that a combination of both Government and Central Bank support remains key to opening up the broader economy. The Government support package of $900 billion agreed by congress was finally signed by President Trump. The Democrats have now won the final two senate seats, giving them the majority. This will ease their ability to alter internal policies in Q1 of 2021 and beyond.
The Bank of England voted unanimously to maintain Bank Rate at a record low of 0.1% and the size of its bond-buying program at £875 billion during its December meeting, as policymakers took a wait-and-see approach amid uncertainty surrounding a post-Brexit trade deal and concerns over the coronavirus situation. The policymakers have commented on the domestic economic data being a little stronger than expected although the outlook remains uncertain. Inflation expectations remain low for the foreseeable future and further support may come should it be felt appropriate.
The yield on UK 10 year government debt decreased over the quarter from 0.28% to 0.23% with capital prices increasing slightly as a result. Investors have looked to the corporate debt markets to provide a higher level of income which has resulted in yield reducing yet still offering some value on a relative basis to gilts.
The European Central Bank expanded its Pandemic Emergency Purchase Programme (PEPP) by another €500 billion and extended it to at least the end of March 2022 at its December monetary policy meeting. This has been used to mitigate the impact of the coronavirus and provide countries with extra room for fiscal policies.
Looking at the investment outlook in the short-term, we continue to focus on fundamentals and companies that have the ability within their business models to adapt to the market conditions. The announcement and subsequent role out as of the vaccines could provide a new cycle in markets. We fully anticipate Central Banks and Governments will continue to provide support. While the detail remains to be interpreted the Brexit agreement has removed some uncertainty for the UK.
We remain slightly overweight equities favouring active managers, who have been trimming and adding to positions when opportunities arise. In the fixed income allocation, the portfolios are positioned to favour the more defensive companies with strong cash flows to meet their debt repayments.
Our portfolios remain diversified across each asset class, sector and geography and our approach has the flexibility to take advantage of the changes in the markets throughout this period.
This information is obtained from sources considered reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.