We’ve made some changes to Nutmeg’s fully managed portfolios in recent weeks, adding to our equity market exposure, and introducing a small holding in gold.
While the world is not short of potential risk events in the months ahead – a conclusion to the Brexit saga, a potential second wave of Covid and the US election to name just a few – we have become more constructive on the shape of the economic recovery that has emerged in recent weeks.
While risk remains, the all-important US economy is beginning to show signs of life with a strong recovery in activity surveys and consumer sentiment. Self-sustaining growth is yet to fully establish itself but the strength of policy support measures enacted by the world’s most powerful central bank (the Fed), and the inherent flexibility of US labour markets – the ‘fire fast, hire fast’ approach – has allowed the US economy to establish a trajectory out of the crisis.
Elsewhere, the recovery picture is more mixed, particularly as the global trade environment remains subdued – yet the commitment of policy makers to support an economic recovery is a global phenomenon, with developed nations in particular taking unprecedented steps to shore up economies and support labour markets. One of the key questions here remains the speed of labour market recoveries in different economies given the different approaches taken by policy makers regionally – and how these measures support a recovery in consumer sentiment and activity in consumer driven Western economies. There is precedent here as, despite the already record levels of stimulus, we have little doubt that policy makers will act further to support economies should they believe it is required.
At the same time, the nature of some economic risks is changing. As society learns more about the virus itself, our approach to containment and management is evolving. This means we are less likely to see the economic kryptonite of full lockdowns instead shifting to a regional approach that is centred on addressing spikes in infections. While Covid-19 will not simply go away (all the previous covid strains still exist today), the focus of the world’s medical and pharmaceutical community on a vaccine is likely to result in greater mitigation in the near-term. A commercially available vaccine in the next 12 months, even if temporary and resembling a yearly flu shot, would be a game–changer for economic recovery.
So, how are our portfolios now positioned?
This week, we have sought to take advantage of the recent equity market weakness to increase equity exposure in portfolios, bringing them back in line with their long-term levels of equity risk.
Within equities, we continue to have a strong bias towards the US market and in particular large cap technology stocks, which are set to continue to benefit from an open-ended generational secular trend. Clearly, we are also conscious of valuation, yet we believe the environment today is very different to that of past tech bubbles – not least when viewed through the current tech leaders’ profitability and ability to generate return on equity and cashflow. We do, however, have a keen eye on the November US general election, and the likely policy shifts a Biden presidency would bring in terms of tax, infrastructure spending and environmental policy.
Meanwhile, we remain significantly underweight UK equities, in particular large cap FTSE 100 stocks. We believe the outlook for the UK economy and UK stock market remains challenging. The ending of employment support programmes in October could herald an all-time–high unemployment rate, at odds with an important recovery in consumer behaviour, while Brexit negotiations have become increasingly frustrated of late and the limited insight into future trading arrangements does little for global investors’ confidence in the UK. But the UK stock market has several further issues that appear to us to be structurally unattractive at the current time such as significant near-term dividend suspensions and a sector bias that leans towards oil & gas, banks and away from technology.
Socially responsible investment (SRI) is also a theme you will also find running through our fully managed portfolios. We have been increasing our exposure to socially responsible focused strategies across our equity holdings in 2020, driven by a view that those companies globally that are recognised as leaders in their sectors when it comes to environmental, social and governance factors, are well placed to deliver outperformance. We also find the significantly lower carbon intensity attractive, given the world’s long-term shift to a lower carbon economy.
At the same time, we remain cautious about the medium-term outlook for emerging markets. Emerging market economies generally lack the financial firepower and sophisticated healthcare systems of their developed market counterparts – two integral aspects of the response function to this crisis. Increased localisation of supply chains in a post–covid world, and long-term structural de-globalisation trends as a result of trade tensions and an increasing environmental commercial and political focus will be a headwind to growth in the coming years.
As ever, we advocate an approach with risk management and diversification at its heart. Despite an expectation that interest rates will be kept low for years to come, we believe government bonds currently present more risk than they have done historically.
Government bond yields lean towards all-time lows in much of the Western world and are, in fact, now negative in many markets. This not only reduces the attractiveness of the medium term returns on offer but also potentially serves to reduce their effectiveness as a risk-off mechanism given there is less room for yields to fall. Meanwhile, inflation remains a risk on the horizon. We still believe government bonds have a core role in portfolios from a diversification perspective, yet we recognise today’s starting point is very different to the past. At the same time, the fiscal risks have risen significantly as central banks have ramped up borrowing to fund the stimulus of their economies. The combination of rising risk and reduced reward ensures we are cautious here – owning less government bonds and in some cases preferring cash exposure in the short term.
Therefore, in order to further diversify portfolios with lower government bond holdings, we’ve recently built small positions in gold – a multi-faceted asset that we believe currently offers enhanced diversification characteristics relative to government bonds – you can read more about this here.
As always, our investment team will continue to position our fully managed and socially responsible portfolios appropriately for our view of the medium-term macroeconomic environment and its risks. We will continue to make strategic adjustments on your behalf where appropriate. While risks remain to the economic outlook, our portfolios remain well diversified.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Forecasts are not a reliable indicator of future performance.