Following a record bounce back in August some global markets were back in positive territory year to date. However, Brexit pressure, the US election and a rising second Covid wave all loom on the horizon. Back in the office for this month’s socially distanced update, our chief investment officer, James McManus, joins our savings and investment specialist and head of PR, Kat Mann, to discuss all these themes and how they’ve impacted Nutmeg portfolios.
World equities had their best August return for 30 years, which saw some markets back in positive territory year-to-date. With fears of second waves of coronavirus, the rapidly approaching US elections and continued uncertainty around Brexit – how did markets perform in September?
September has been a much more volatile month for equity market returns, particularly in markets that had an exceptional August, such as the US growth and tech focused Nasdaq index. If you remember back to how we started the month, global developed market stocks, of which the US stock market currently makes up around 67%, were up over 6% in August – the strongest month for August returns since 1986.
As we progressed into September, markets took a more pessimistic tone as investors recognised the confluence of risks emerging - a sustained rise in Covid infections in Europe, the continuation of political discord in the United States, and the declining likelihood of a further fiscal support package being delivered before the November election, while nervousness arose around the outcome of the election itself and the potential for a close contest and extended period of uncertainty over the result.
So, while the Nordic region and Japanese stock markets managed to deliver positive returns in September, most other stock markets globally finished the month in negative territory. Global stocks finished the month down -3.4% in local currency terms, led by the US stock market where losses totalled -3.8% for large caps and –5.7% for the growth focused Nasdaq index. Mainland Europe fared better than most with losses of around –1.8% and the UK stock market closed the month down -1.5%. Emerging markets meanwhile outshone some of their developed peers, delivering returns of around –1.6%.
You’ve mentioned tech stocks, and there seems to be a lot of attention in the news at the moment about sectors that are driving market changes – perhaps most notably aviation and tourism on the negative side, and tech on the positive side. What other factors are driving markets at the moment?
When it comes to sectors, there is clearly a large dispersion in outcome for industries and business models that are more or less affected by the changes in society over the previous six months or so. But this is also reflected at a stock level too. Not every company in heavily affected sectors has performed poorly and not every company in the technology sector has performed strongly. What this points to is the unevenness of effect of Covid on businesses, and economies.
This unevenness is also reflected in many economic measures. The rise in personal incomes in the United States over the previous six months has been driven largely because job cuts have been focused on low income workers – the extended unemployment benefits therefore driving up personal incomes across the board.
Similarly in the UK we see a huge disparity in the unemployment figures between age groups – where younger workers have been disproportionately affected by job cuts, and in the effect on the part-time work force versus the full time workforce. Full-time employment has held up relatively well so far in contrast to a sharp decline in part-time employment.
This correlates with what we’re seeing in terms of most affected sectors – hospitality or travel for example. This unevenness in outcome will be a key focus for policymakers and will likely lead to some structural dynamics in economies for years to come.
Against this backdrop, how did the Nutmeg fully managed portfolios perform during the month?
Given what we’ve covered in terms of market behaviour, portfolios gave back some of the gains of recent months in September. In our fully managed portfolios, that means returns for the month of around –0.20% in low risk portfolios, -0.85% in medium risk portfolios and –1.20% in the highest risk portfolios.
Our socially responsible portfolios delivered returns for the month of approximately –0.30% in low risk portfolios, -0.50% in medium risk portfolios and –0.60% in the highest risk portfolios.
Given everything that’s happened lately, have you made any changes to the Nutmeg fully managed portfolios?
We did make a number of strategic adjustments to fully managed and socially responsible portfolios in September.
First, we took advantage of the recent weakness in equity market performance to increase equity exposure in our fully managed and socially responsible portfolios, bringing them back in line with their long-term levels of equity risk.
Second, we added a small holding of gold in some portfolios, replacing a position we held in inflation protected US treasuries – or TIPS. TIPS had performed relatively well of late as inflation expectations recovered and with government bond yields leaning towards their all-time lows in much of the developed world we have chosen to reallocate some of the funds to gold, an asset we believe can offer more attractive diversification dynamics in the current environment.
We’ve already touched on Brexit, and the US presidential election on the horizon, are there any other economic or political events likely to move markets between now and the end of the year?
There’s always plenty of other drivers for markets. Clearly we are still in the midst of a significant health challenge globally, and we expect there to be volatility related to Covid-19 issues for the foreseeable future. That volatility could of course be positive or negative – the potential for a viable vaccine in the next 12 months, if even only temporary, has the potential to lift markets rapidly should it come to fruition.
And global policy makers remain intent on delivering a robust economic recovery, which it appears will likely require some further policy action – whether monetary or fiscal. The European Central Bank is seen as highly likely to expand its quantitative easing program later this month, we’ve seen the UK furlough scheme evolve as the Chancellor recognises the threat to jobs near term and we still expect a further US fiscal package to be approved sooner rather than later.
Of course, there are always risks too – some predictable and some less so. The US-China trade relationship is a topic that has been eclipsed of late but remains a thorny issue and the approach of any new US administration will be watched closely.
This month’s customer question comes from Chris via YouTube, and he’s asked: “With the current rate of gains of the tech sector, would you consider re allocating portfolios in a heavier tech friendly way?”
We continue to have a strong bias towards the US market and in particular large-cap technology stocks, which we feel are set to continue to benefit from an open-ended and potentially generational secular trend.
Of course we are always conscious of the valuation in the technology sector, but we think the environment today is very different to that of past tech bubbles such as the early 2000s where the price of technology stocks became very inflated – not least when viewed through the current tech leaders’ profitability, and ability to generate return on equity and generate cashflow.
Rather than solely a growth focus, at a time of uncertainty for corporate earnings many of these companies offer investors strong balance sheets and increased recurring revenues - for example the subscription-based models that the likes of Microsoft, Amazon and Netflix operate. And the relatively strong earnings results delivered so far this year underlines the case here.
But I think it’s also important to think of the theme of technology as also being a theme of digitalisation across industries. Much like Nutmeg is an investment business that uses technology to deliver a service in a more accessible way and with greater efficiencies, digitalisation across industries is driving greater competition and disruption of existing business models. Of the famous FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (now Alphabet), only Apple technically qualifies as a technology stock under industry definitions.
Why not increase holdings? Long-term the technology sector has been significantly more volatile than the wider market index. We already have a significant exposure to the technology theme across our portfolios when we decompose the holdings of our various US and global equity ETFs, and so this must be balanced with the need for diversification. And although we believe the outlook remains favourable, there are always risks on the horizon. Both US election candidates have signalled support for greater enforcement of anti-trust regulations in the United States and it’s clear technology stocks will face greater regulatory scrutiny in the years ahead. So, it’s a case of recognising a structural trend but balancing the risk of how we are exposed to it.
About this update: This update was filmed on 7 October 2020, and was recorded with strict social distancing measures in place.
Data sources: Bloomberg and Macrobond.
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.