Nutmeg investor update: December 2020

Does the news about the development of three potential Covid vaccines mark the turn upwards in the road to recovery?

Back in March when markets were most volatile, we talked about three response functions – the health response, the monetary response and the fiscal response – the health response being one that really leads us out of the crisis. And November’s positive developments for a number of vaccines have provided the good news the world has been holding out for all year.

For equity markets globally, the news was clearly a major boon in November, with global equity markets recording their best monthly performance since 1975 and in fact their second-best monthly returns of all time. European stock markets were particularly buoyed by the vaccine news, with a record monthly gain of 17.1%, whilst almost all other developed market equity markets registered gains in the double digits for the month. Emerging markets meanwhile lagged their developed peers but it was a particularly good month for higher risk small cap stocks in both the US and Europe, reflecting the importance of economic normalisation to smaller companies.

But does this mean we’re firmly on the route back to normality? It would be foolish to say that at this stage. What we do know is that there would appear to be light at the end of the tunnel given several vaccines are in their final stages of approval, and that’s certainly a promising development that, at worst, will reduce the need for damaging activity restrictions in the medium term.

Now near-term clearly there are still challenges – formidable ones in terms of the continued health challenges many countries face and of course the logistical challenges of rolling out vaccines and the length of protection they provide. But taken alongside a global economy that has once again found its feet in recent months, we’re cautiously optimistic that the worst is now behind us and that’s really what has been reflected in the prices of financial assets on the back of vaccine news in November.

Cautious optimism feels apt as we come into the Brexit endgame – is the potential good news of a deal being spiked by some pretty challenging data on the UK economy?

It’s no secret that the UK has struggled the most economically out of the G7 economies as a result of Covid, and November’s economic data suggests the UK could experience a double dip recession as high frequency economic activity slows again due to a second national lockdown.

We’ve also seen continued support enacted from policymakers to support the economy but this has also led to an expansion in borrowing and a record high government deficit. But there are pockets of brightness – despite the labour market woes, housing data remains strong and before the second lockdown, business and consumer confidence was building. However, we know this is not a typical recession – it revolves around temporary halts in activity and as we come out of the second lockdown we expect to see an improvement in the data.

On the Brexit front, I think we are nearing the final endgame now. Whatever type of Brexit emerges from the negotiations, foreign investors have long had a buyers’ strike on UK assets and rebuilding that confidence will not be just as simple as agreeing a light trade deal. There are certainly attractive aspects to UK assets at present – they are comparatively cheap, and any deal would lift the value of sterling. But there are other factors to consider too – the sector mix of the UK market, whether we will see a recovery in dividends and the fact that many large cap UK companies rely on overseas revenue and thus a higher GBP is a headwind to profitability.

The other big news for November was the protracted but now, it seems, concluded US presidential election. What’s your perspective on a Biden White House going forward?

With the vaccine news flow coming shortly after the US election it’s easy to forget that ahead of November, that was the real focal point for financial markets. The outcome as its stands is likely one of the most favourable from a financial market perspective – a more predictable leadership approach but a restraint on the ability to enact the Democratic legislative agenda in Congress putting the brakes on.

But we shouldn’t forget that the election is not concluded in one key way – the Senate race has not yet been decided. In fact, the result of two seats is now going to a January 5th run-off with the potential for Democrats to yet seize control of the legislative agenda. Should they win both seats, that would tie the Senate at 50 democrat/50 republican seats, and critically hand the final deciding vote for future debates to the US Vice President: Democrat Kamala Harris. So, all still to play for as we move into the New Year.

In terms of what we expect to see more broadly from a Biden presidency, in the near term, we think there’ll be a more progressive approach to tackling the Covid issues, including greater fiscal spending and thus potentially greater fiscal risks. Biden has also been clear on his intentions to adopt a more progressive approach to climate issues, including heavy investment in the clean energy sector in an attempt to transform America’s energy mix in the decades ahead. Of course, the issue of taxes will be on the medium-term agenda whilst on the issue of thorny trade relations with China, we don’t expect the US to cease taking a hard line but we expect a more targeted and diplomatic approach in the years ahead.

Expanding on that, could you tell us where else you’re looking for positivity in 2021, following the year that was 2020?

Without getting too excited about the potential for a rapid normalisation of life on the back of vaccines, there are many reasons to be positive on the outlook for financial markets in 2020.

When we look across the global economy, it is clear there is much healing still to take place. But, there is also evidence that we are in the early stages of a self-sustaining recovery – we’re seeing a sustained rebound in global manufacturing data, business and consumer confidence is rising as labour markets continue to recover, and even the investment picture is brightening somewhat.

There are real pockets of positivity – the US housing market, to pick one example, would appear to be in very robust shape. It’s easy to forget that record levels of monetary and fiscal stimulus have been pumped into the global economy over the previous 9 months, and so as we begin to recover from the lows in activity and confidence, and we meet the challenges that Covid has laid down, the ingredients are potentially there to allow that recovery to flourish.

So, while there are always risks on the horizon, we are constructive about the year ahead for financial markets and the global economy – which we expect to continue to strengthen as activity picks up in 2021. That should increasingly favour emerging markets but we also retain the view that the flexible nature of the US economy puts it in a position of strength in the recovery phase.

How have the Nutmeg fully managed portfolios performed this month?

Given it was such a strong month for global equity markets, it will be no surprise that it was a strong month for portfolio returns too. In fact, the average Nutmeg client portfolio had its best ever month of absolute returns in November. This meant returns ranging from around 2% in lower risk portfolios through to returns of just under 10% in higher risk portfolios.

Given the large moves in markets in November, have you made any changes to the Nutmeg fully managed portfolios?

We did make a number of adjustments to our fully managed portfolios in November, largely due to the timing of gains and losses in markets. Firstly, in the run up to the US election we rebalanced our equity exposure after markets had drifted lower in October, to ensure we were appropriately positioned for the election.  Then, given the extremely positive performance of equity markets within the month, we again rebalanced the overall equity position towards the end of the month to manage risk as our equity components grew extensively. Rebalancing twice in a month is unusual for us, but then November was an unusual month.

Our last question comes from Jason J on YouTube, who, following our last investor Check-in, wanted to ask: “With the shift of the centre of economic activity towards Asia, will Nutmeg then look to rebalance for a somewhat heavier allocation towards Asia?”

As you may have guessed from our emerging market views, we do have a constructive view on emerging market Asian economies, where we’re seeing sustained momentum in activity recovery and the global trade environment improves. Emerging Asia has broadly been quite successful in controlling the second wave effects of Covid, and similarly to the US, the region has a high exposure to technology associated companies who will continue to benefit from the secular trend in digitalisation. We shouldn’t forget that Asia economies are export oriented, and that means they need buyers of their products – something that activity restrictions in the West can heavily effect. So again, we are cautiously optimistic here – we think the signs of a self-sustaining recovery emerging in global trade and manufacturing are positive for Asian economies.

About this update

This update was filmed on 5th December 2020 and covers figures for the full month of November 2020 unless otherwise stated.

Data sources

Bloomberg and MacroBond.

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.