For this month’s update our wealth consultant manager, Chandni Gupta, spoke with our chief investment officer, James McManus, on the recovery trajectory for 2021, market headwinds, stimulus policy, Asia’s performance and the breakdown of Nutmeg’s SRI portfolios.
It seemed like markets had a relatively positive start to the year but as the month progressed, we have seen the return of some volatility. How did markets perform in January?
Well, stock markets across the globe certainly started the month brightly, picking up where they left off last year with major indices in the US and emerging markets reaching new all-time highs towards the middle of the month. That strong start was powered by a continued recovery in many global trade indicators and a strong month for Asian equity markets. US smaller companies have also continued their strong performance, buoyed by the prospect of further US fiscal support.
Unfortunately though, the bright start to the year in equity markets couldn’t be maintained in the final week of January. Global stock markets turned lower as volatility returned, with developed stock markets ending January around 1% lower than where they started. However, emerging markets’ brighter start to the month meant they still finished 3.8% higher than where they ended 2020. Closer to home there has not been any material relief rally in UK equities following the conclusion of the Brexit agreement: UK equities delivered slightly negative returns on the month, though they were broadly in line with the global index.
Meanwhile government bonds witnessed their worst month for performance since August, with bond yields in the US rising on the back of a Democrat controlled Senate and further fiscal stimulus proposals. Here, UK bond yields have risen sharply in January despite the continued economic challenges. That left gilt investors with losses of around –1.7%, whilst the main treasury bond index fell –0.9% in local terms. Coupled with gold falling around –2.5%, that meant little in the way of safe havens for the final week of the month, leaving many multi–asset investors with muted losses year to date.
So, a mixed month for returns but have we seen the impact of the Covid second wave in the economic data from the final part of last year and is the global economic recovery intact?
On the data front, January brought with it an opportunity to assess how major economies faired in the final quarter of last year and how much that second wave of Covid has affected the trajectory of economic recoveries. We know that activity restrictions will have an effect on the data and on sentiment and we have begun to see that feed through. We’ve seen some softness in US labour market and business confidence data towards the end of the year, while some activity surveys have slowed from previous levels. But – in the US in particular – many activity measures remain robustly in expansion territory and it’s clear that, despite the rising case rate, an economic recovery is consolidating in the world’s largest economy.
Closer to home the story is more nuanced. We’ve seen a continued rise in the UK unemployment rate and, while the manufacturing sector has held up relatively well, the services sector, which makes up most of the economy, is clearly feeling the effects of extended activity restrictions. But importantly we’ve also seen continued policy support, while UK vaccine progress is a positive dynamic as Covid cases fall.
Alongside the macro-economic data, we’re currently in the midst of the earnings season for corporates and, so far, it’s a largely positive story. In the US, just under half of companies have reported results for the final three months of 2020, comprehensively beating market expectations with an average earnings’ growth of around 3%. In Europe, earnings’ growth still remains negative on average but again earnings have beaten market expectations and are moving in an encouraging direction.
So, the data we’re seeing is largely as expected: we knew a second wave would bring with it a short–term depression of activity in some sectors, though this has largely been discounted given we know activity will pick up as lockdown measures are eased again.
The Covid pandemic, and how vaccines are now beginning to counter it, is obviously the key global variable. What’s the latest here for market concerns and should we be worried about the recent international disagreements?
That’s right, despite all of the headlines around individual stocks and day traders in the latter part of the month, it’s still the Covid-19 pandemic that presents the largest risk to the economic outlook. January brought with it much progress in terms of vaccine roll–out in some developed countries, but also highlighted the challenges of controlling further waves and the disparities of the vaccine approaches taken by individual nations. The further fiscal stimulus proposals from the new US administration have underlined the current critical stage of the economic recovery.
When it comes to the political challenges, we would see these as largely side–shows to the bigger issue at hand for markets: the speed and trajectory of the global economic recovery. We knew a second wave was likely over the winter and the encouraging signs are that cases are falling in the western economies which have suffered the most.
European nations have found themselves at a disadvantage in terms of vaccine roll–out speed and supply; a factor that will increase political pressure for those governments concerned. It’s certainly an interesting dynamic for investors in terms of a given nation or region’s ability to source and administer vaccines – and what this means for international travel and trade in the medium term. This variable is particularly concerning for emerging markets, where mass vaccine roll–outs would appear quite far away.
That said, markets are well accustomed to political risks, particularly in Europe. Though we are closely watching Italy following the resignation of prime minister Conte. Of course, President Biden’s early policy actions are also important, particularly in how his administration approaches US trade and the diplomatic relationship with China.
Based on all we’ve been through, have you made any adjustments to the Nutmeg Fully Managed portfolios?
Yes, we did take the opportunity part way through the month to rebalance our equity exposure, trimming gains in the portfolios after a strong end to 2020 and that positive start for equity markets in January.
We still remain slightly overweight equities, but in our higher risk portfolios we sold some Nordic equity exposure after a period of strong performance against mainland European shares; thereby adding to smaller companies in Europe. In our lower to medium risk portfolios, we reduced the extent of our overweight in the US in favour of more emerging market equities.
And how have Nutmeg Fully Managed portfolios performed this month?
Well after a bright start, January has really turned out to be a muted month for investment returns across the board. For our fully managed portfolios, January delivered returns of –0.7% for lower risk portfolios, -0.8% in our medium risk portfolios and –0.1% in our highest risk portfolios.
There’s been a lot of recent news about the GameStop share price phenomenon and the countering of short positions. Could you give us the Nutmeg investment team’s view on this story?
This is something that has dominated headlines in the last week of January but, despite that, it’s really a periphery story in terms of its impact on global stock markets. The power of the herd is certainly not something to ignore but I think the most important aspect to understand here is that this is not decision–making based on fundamentals: this isn’t stock–picking per se. It would appear to be a technical factor that has driven the shares higher. Clearly, that is also related to the number of individuals trading the stock.
This is very speculative behaviour and, personally, I think it’s akin to gambling. The volatility in the price of the shares has been extreme in the final days of January and the share price would appear incredibly overvalued at the current time. As with any single stock investment, there is no diversification of risk and so many investors will face significant losses should the share price normalise. Given what has taken place, it is highly likely to be the subject of a regulatory investigation when the dust settles.
Our view would simply be that investors shouldn’t chase these short-term speculative investments. The dynamics at play are more complex than many believe them to be and there is a high likelihood of losses. Instead, the evidence shows us that diversification is the key to managing your risk and offering you the best chance of achieving your investment goals, and that investors are rewarded for patience and discipline rather than speculative behaviour in the medium term.
Finally, to help our clients better understand our socially responsible portfolios, could you give us an update on their make up?
So, our socially responsible portfolios (SRI) are designed for investors who are looking for an actively managed investment portfolio and seeking greater alignment between their personal values and their investments. SRI portfolios are managed much the same way as our fully managed portfolios: following an investment strategy set by the Nutmeg investment team. They invest in a range of exchange traded funds (ETFs) that are tilted towards companies that are the leaders in their industry in terms of environmental, social and governance (ESG) alignment and away from companies involved in controversial activities, such as weapons manufacturing and companies who lag their peers when it comes to ESG issues.
The methodology behind how companies are selected in these ETFs continues to evolve with ongoing engagement from the investment community, including the team at Nutmeg. In particular, many of the funds utilised have nuanced the way in which they treat climate related issues and activities. This means the approaches have become more stringent when it comes to companies involved with fossil fuels related industries. Specifically, the equity funds used now apply additional screens to exclude companies with ownership of fossil fuel reserves. They also have a much lower tolerance to involvement in activities such as thermal coal mining, conventional and unconventional oil and gas extraction, and power generation from fossil fuels.
This further reduces the carbon intensity of our socially responsible portfolios, removing many of the large energy companies that were previously present by virtue of being leaders in their peer group on ESG issues. While it is very difficult to remove absolutely all exposure to fossil fuels from a globally diversified investment portfolio, our SRI portfolios continue to offer a materially lower carbon approach to investing.
If you have a question for James or our investment team you can reach out on our social media channels. Stay safe and we look forward to seeing you next month.
About this update: This update was filmed on 02 February 2021. All figures, unless otherwise stated, relate to the month of January 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.