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 The famous phrase “a week is a long time in politics” has seemingly never been more apt! At the beginning of last week, Joe Biden was deemed a clear favourite to win the US Presidential Election, yet as the results came in, it appeared that Donald Trump would once again confound the pollsters with another surprise win – even going so far as to prematurely declare himself the victor. As we now know, Biden is the President-elect and although Trump will pursue claims of widespread election fraud through the courts, we would not expect any other outcome than President Biden taking up residence in the White House on 20th January. 

Before the election there were fears in some quarters that a Biden victory would not be welcomed on Wall Street. These fears have so far proven ill-conceived, with global share prices rebounding strongly once it became clear that Biden had won. Whilst traditionally a Republican President may be favoured by Wall Street, Biden will surely be a more diplomatic presence in the White House and that bodes well for the United States’ global economic relationships, particularly with China. 

The US Election took place against the backdrop of an ongoing global pandemic, which has dominated investors’ thoughts for most of the year. With new lockdowns being imposed across Europe as a second wave of infections threatens to overwhelm national health services, global equity markets had started to lose ground during October. The news this week of Pfizer’s 90% success with its vaccine trials has led to a strong bounce in global share prices and we hope that this marks the start of a sustained stockmarket recovery. We would however remind investors that a vaccine will take time to produce, distribute and administer on a global scale. Therefore, as winter approaches and infection rates, hospitalisations and deaths continue to rise in various countries, including the UK, it is too early to discard Covid-19 as a threat to life and livelihoods. 

The positive vaccine news does however bring hope that we might see lives start to return to normal sooner rather than later. This is an important step on the road to a recovery in investment values. History shows that in times of economic crisis, the stockmarket recovery usually starts before the economic recovery. We would therefore not be surprised to see markets continue to rally over the coming months in anticipation of a wider economic recovery to follow. 

Whatever might happen in the short term, the view of the Investment Committee is that the outlook for investments remains positive over the medium to long term. This is not to discount the possibility of a sharp rise in unemployment when the furlough scheme eventually ends in March 2021 (unless it is extended again by the Chancellor) and other similar job support schemes end in other countries. We do however feel that it is likely that Governments and Central Banks will continue to support their economies through a variety of loose fiscal and monetary policies, from job creation initiatives through to quantitative easing. Although budget deficits will eventually have to be addressed, it makes far more sense to do this once a strong economic recovery has been secured, rather than risk that recovery by withdrawing stimulus too early. 

The Investment Committee also considered the ongoing saga that is Brexit, with the UK’s transitional agreement set to end on 31st December. At this late stage, we are still not certain what a post-Brexit trade agreement with the EU will entail, however we are optimistic about the prospects for UK economy to adapt to whatever trading conditions apply. This will hopefully lead to the end of the “Brexit discount”, which we believe has kept UK shares at lower valuations relative to other major stockmarkets since 2016. That is not to say that we expect a sharp bounce in the UK stockmarket immediately, but we would hope to see UK share valuations steadily revised upwards over the medium term. 

In our most recent meeting, the Investment Committee discussed whether we should amend our asset allocation models in anticipation of an increase in demand for risk assets. In particular, we discussed the all-time low yields on Government Bonds (Gilts) and the potential for yields to rise, and therefore for values to fall, in the event that investors switch focus to risk assets offering greater potential returns. This risk was evidenced by a fall of 1.25% in the price of 15 year Gilts on Monday 9th November, at the same time that the FTSE 100 Index rose by more than 5% following the positive vaccine announcement from Pfizer. 

Although we are conscious of a potential fall in Gilt prices as investors seek potentially better returns elsewhere, this doesn’t necessarily mean that the prospects for corporate fixed interest securities are also negative. In fact, corporate bonds are also likely to be beneficiaries if investors decide to sell Gilts, with some of this capital expected to be redirected into corporate bonds offering higher yields. Corporate bond funds, as well as equity funds and property funds, could also be seen as a viable alternative to cash. There seems little prospect of UK interest rates rising in the near future and with the likes of NS&I cutting interest rates to as low as 0.01%, we would not be surprised to see money flow from savings into investments once the fear factor of the global pandemic subsides. 

On the subject of UK property, most property funds have had their suspensions lifted since our Special Market Update in September. As stated in that Update, we continue to believe that commercial property is a key component of any diversified portfolio and we see no reason to reduce exposure to this sector at the present time. We will however monitor developments affecting commercial property closely over the coming months. 

Although there is growing confidence surrounding the long term prospects for real assets such as shares and property, the Investment Committee decided that we should not increase exposure to riskier assets at this time, as the pandemic is not over and short term risks remain at a heightened level. Nevertheless, this is a subject that we will revisit at the next Investment Committee meeting. 

Although we feel that our asset allocation models remain appropriate across the different risk levels, the Investment Committee agreed that changes should be considered to the underlying funds in client portfolios. In particular, we feel now may be a good time to increase exposure to actively managed stock-picking funds. The potential benefits of a stockpicking approach can be shown in the very recent performance of US equities. Since the start of the pandemic in February, the broad-based US stockmarket index, the S&P 500, has actually risen to new all-time highs on multiple occasions. This is largely the result of a handful of big technology companies which dominate the Index. In specific terms, Apple, Amazon, Alphabet (owners of Google), Microsoft and Facebook make up around 25% of the Index and their share prices have risen by an average of 45% in 2020. However, following the Pfizer announcement at the start of this week, the share prices of all 5 companies dropped as the wider market surged. This demonstrates the value of being in the right areas at the right times, rather than maintaining a rigid strategy that closely replicates the Index. 

We will be writing to clients on an individual basis over the coming weeks to confirm recommendations to change underlying funds where appropriate. At this stage however, our over-riding message is that we are confident about the prospects for a strong market recovery to take place over the next few years, even though we are not out of the woods yet and further volatility may be seen in the short-term. 

Vintage Investment Committee (10th November 2020) 

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This post was written by The Vintage Team