For Nutmeg’s April investor update, our senior technical lead Shaun Stone, spoke with our director of investment strategy Brad Holland about stimulus fruition, tech stocks, the US and China, emerging markets and rising bond yields, as well as taking a look at our portfolio performance.
It seems to have been an eventful year so far for investors, what did March bring?
Well, it brought good returns to the major developed equity markets, with global developed indices rising between 3 and 4%. That finished off the first quarter with developed markets growing 5% and emerging markets still up 4% on the quarter, despite a small drop last month.
Japan and Europe showed the highest monthly gain, helped by currency weakness and a growing confidence around economic reopenings. Markets that lagged in 2020 have enjoyed a bit of a catchup phase so far in 2021 – that includes smaller companies that are expected to benefit from the ending of Covid shutdowns.
Bond yields rose in the US, partially reversing the falls they made last year when the Covid emergency began. That normalisation process probably has further to run, and other bond markets are likely to follow, even though central banks are not expected to raise shorter term interest rates for a very long time.
Is it still all about the vaccine rollout then?
Well, it’s a lot about that. However, don’t forget Europe is not exactly doing great on that front. Market performance is also about government policy on stimulus: President Biden’s $1.9 trillion package was passed and is being quickly followed by a potential $3 trillion infrastructure package. This is all good news for the US economy; and good news for the US is also good news elsewhere as global activity tends to benefit from a strong US.
There are other reasons for the positive mood. Global trade suffered significantly in 2019 following Trump’s trade war, and this collapse then accelerated during the first lockdown. Trade is now showing signs of recovery: we see that in the manufacturing and construction cycles, in the fixed–equipment investment cycle and in commodity prices.
So along with the gradual reopenings, there is also a sense of reinvigoration as various cycles are lining up following a long hiatus.
So, given that generally positive outlook for equities, how does Nutmeg choose where best to invest?
Technology stocks benefitted last year, in part due to the shutdowns but, beyond that, there are other reasons to remain positive on tech as things reopen. The first is profit margins, which are both wider and more stable. Although greater regulation in this space will most likely trim these margins in the future, they still are expected to remain wider than traditional industrial company profits.
The second is the fact that technology will now be more deeply embedded into all businesses. Covid has fast-tracked changes to work practices that could otherwise have taken generations to happen.
The main way to access quality technology growth stocks is via the US and China, which is why we continue to keep the portfolios slightly overweight in the US and emerging markets. As I mentioned, there has been a bit of catch up by other markets in the first quarter, and emerging markets actually fell just under 1% in March, but we think tech will remain resilient.
Emerging market countries have struggled with their Covid response, but we expect self-interest to ensure developed economies increasingly make vaccines available to less wealthy countries. Nutmeg’s views about improving global trade are another reason to generally favour emerging markets.
One last area of interest to us is smaller companies. Despite the global recovery seen in the economic data, the changes to the global supply chain – driven by US-China competition – will be permanent and for some countries – like the US and China – supply will become more domestically orientated. Meanwhile, government policy everywhere is intended to build up local economies. So, both these factors point towards increasing exposure to smaller, more domestic, companies.
How have Nutmeg’s fully managed portfolios performed in March?
Well, the high–risk equity portfolio rose over 3.5%; mid-risk multi-asset portfolios rose a bit above 2% and lower risk portfolios grew less than 1%.
Were any changes made to Nutmeg’s fully managed portfolios in March?
I mentioned our thinking on the US, emerging markets and small cap companies. Last year the portfolios benefitted from an underweight in US small cap but given the changes brought about by new government policy stimulus, we have moved to a more long-term neutral holding of US small cap.
This month’s client question comes from Chris Carr, who asks: ‘As the 10–year treasury yields steepen in the US, putting pressure on tech, do you see this as a buying opportunity or a more fundamental rotation away from tech and higher, riskier valuations long term?
Thank you, Chris, that’s a very fair question. It’s true that lower bond yields make growth companies (like tech) seem more valuable in present-value-calculations. I’ve already mentioned why we’re keeping our view positive on technology for the medium to long term. But, as you highlighted, the rise in bond yields this year – and really since Summer 2020 – is a key market event and worth exploring. We are viewing it as a sign of the re-emergence of normal conditions following bond yields’ extreme lows last year on the back of the global policy response to Covid.
We have all seen the equity market confidence resulting from this ongoing government policy effort. This year, that confidence has moved also into commodity and bond markets as well as into trades known as “value-trades”. Value trades are investments that outperform when bond yields rise: small cap companies are one of these. Europe, which has seen 9% performance year-to-date, is traditionally viewed as a value trade too.
So, in the fully managed portfolios here at Nutmeg, we continue to favour tech stocks but have recently aligned portfolios to enjoy a fuller benefit of small cap performance. It’s important to stress that we don’t view the rise in bond yields so far as being disruptive to asset markets. They are not above central bank inflation targets and are therefore supportive of those growth assets that can deliver above-inflation returns.
If you have any questions for Brad or the investment team, or something you’d like answered in next month’s investor update, you can contact us via social media.
We look forward to seeing you next month.
About this update: This update was filmed on 06 April 2021. All figures, unless otherwise stated, relate to the month of March 2021. Source: MacroBond, Nutmeg and Bloomberg.
Risk warning: 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. Past performance and forecasts are not reliable indicators of future performance.