Investment Update – Summer 2021

Global stock markets have continued their upward march since our last market commentary in April. When compared to the darkest days of March 2020, the US S&P 500 stock index has now doubled in value and broadly similar, albeit slightly less impressive, figures are being witnessed by other key market exchanges.

The effectiveness of leading vaccines has largely been confirmed by the data.  Covid-19 fatality rates have been vastly reduced in recent months whilst the risk of transmission throughout the population has also notably faded.

Not only is this encouraging in itself, but governments have collectively, for the most part, responded by getting their acts together rolling out supplies across the globe, no doubt incentivised by the financial prospect of a return towards economic ‘normality’.

This positive vaccine picture gives us greater confidence that the worst might be behind us. Of course, we must not forget that no vaccine is 100% effective and further mutations and variants could yet change the picture. However, the facts would suggest that a light can now be seen at the end of the tunnel as far as economic – and hopefully daily – life is concerned. Inevitably there will be winners and losers from the changes brought to the world. For example, commercial property landlords might face new pressures from changing work and shopping habits, but it would appear that ‘business as usual’ is getting closer.

Notwithstanding the progress made in taming the virus during the first half of the year, a defensive rotation was simultaneously taking place beneath the surface in financial markets. Inflation fears (prevalent in January and February) receded almost as quickly as they prevailed! Related rising bond market rates retreated following a brief but aggressive rise. For example, US 10-year Treasury yields rose from sub 1% in late 2020 to almost 1.8%, before falling back down to 1.27% at the time of writing. UK Gilt yields followed a similar pattern. Such examples of market zig-zags in the short-term confirm to us the importance of not losing sight of the longer term picture.

As economic growth expectations weakened and inflation fears petered out more recently, some of the shine was taken off a chunk of the recovery trade. Consequently, Value, Commodity and Smaller Cap shares stalled in June as market participants looked for shelter in larger, ‘safer’ Growth stocks with greater structural prospects (but also with greater price tags).

Less aggressive economic growth forecasts might also serve to provide an important extended signal that the zero interest rate punchbowl might not be taken away any time soon. This is important when considered alongside the enormous global debt pile that has ballooned as a result of fighting the pandemic with economic stimulus. With such a large debt mound to work through, it is inconceivable that policymakers would wish to raise their own financing costs. With reopening prospects looking rosier, that seemingly offers something of an extended set of ‘Goldilocks’ conditions (not too hot, not too cold, but just right) for a little longer yet – hence explaining the continued sugar rush dynamics.

We have written several times that we feel some areas of global stock markets appear excessively valued, matched only by the degree of their popularity. In particular, US Tech/Growth names fit the bill, with these forming a large proportion of major US indices (circa 30%). Furthermore, the US stock market itself now represents nearly 60% of global stocks by value (roughly doubling from the level of a decade ago). This has been fuelled by the increasing popularity of the ‘FAANG’ Tech stocks, ESG (Environmental, Social, Governance) trends driving money into the same stocks, a shift toward passive investments that track the largest global stocks and momentum trades. All these are providing a wall of money that appears less concerned with elevated valuations, but that continues to extend this trend further still. Bearing this in mind, we continue to exercise caution with regard to areas of extreme popularity where we believe high valuation levels might come to pose a concern at some point. But until then, the music continues to play and everyone is up dancing.

The FTSE 250 Mid Cap index and UK Small Caps have surged over the past six to nine months since the recovery trade switch was flicked. Sterling assets are starting to get noticed again now that the worst of the Brexit uncertainty appears to have passed. The FTSE 100 index has fared well, albeit less spectacularly than its younger siblings. European stocks, which are more geared to global economic recovery, have also started performing over the past six months or so.

All in all, markets are continuing to absorb good news, but we remain aware that much complacency seems apparent with regard to high valuations in general. Much of this is due to the assumption of low interest rates for the foreseeable future.

The damage that unexpected inflation could cause to both components of a classic 60/40 Equities/Bonds portfolio is never far away from our minds. Should such a scenario prevail, we believe our more rounded exposures to portfolio construction and consideration of many of the historical drivers of long-term portfolio returns, could provide a greater shelter from such forces, as well as possible beneficiaries in many cases eg Commodity stocks, Value, Gold, Absolute Returns.

Ultimately, we will continue to manage your investments with discipline and without distraction in what we believe to be the most appropriate style – leaning into areas where we see value and exhibiting caution in those where we feel such a stance is warranted.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Investment Update – Spring 2021

The state of the world’s health seems to have turned a corner since our last  investment communication. Notwithstanding the terrible situations in those countries struggling to get on a grip on the pandemic such as India and Brazil, at last there appears to be real hope that COVID-19 will be defeated sooner rather than later.

Although it was inevitable that the progress of individual nations has varied, it is shameful that political ideologies and squabbles have taken priority over human life in too many instances. Thankfully the UK and US administrations have placed considerable focus on their vaccination efforts, as have some smaller nations such as Israel, bringing with it a reduction in transmission rates

The hope is that something closer to daily life will now follow, at which point much of the lost ground of the past year could potentially be made back in terms of both economic recovery and personal freedom.

Against this backdrop, it was perhaps not surprising to have seen Value/Recovery stocks surge since the first vaccine announcement was made in early November. Smaller companies, with their increased sensitivity to global economic growth, also outperformed.

Although the entire stock market tide rose, highly priced Growth/Quality/Momentum stocks (in general terms, past winners of recent years) have struggled in a relative sense since the first vaccine announcement in November. Global Technology (+9.6%) and Healthcare (+2.2%) have seen relatively muted gains compared to Financials (+28.4%) and Commodity Producers (+35.6%). [MSCI World sectors measured in GBP terms between opening prices 09/11/2020 to 20/04/2021]. There is talk that this rotation into ‘out of favour’ sectors is the beginning of a longer trend. Either way, the KMD portfolios have enjoyed this turn in sentiment and are well positioned if the new momentum does persist.

Commodities prices have trended upwards in line with anticipated economic demand. There is a suggestion that notably higher demand could create supply shortages and inflationary squeezes. Supply chains have also been disrupted by the impacts of semi-closed economies – notably in semi-conductor chips – in which Sino-American tensions have also become elevated.

Whether or not inflation may come to rear its ugly head has become a big discussion point in financial market circles in recent months. Central banks are keen to introduce some mild inflation into the system as it would be a useful way of helping erode some of the gargantuan public debt pile by stealth.

According to central bankers, although central bank policy interest rates globally look set to stay on the floor for several years, bond markets have started to price in a legitimate case for higher interest rates sooner than was generally expected back in late 2020. This will no doubt please savers.

As a result, global bond yields spiked rapidly during January and February causing significant losses to conventional defensive fixed income Government bonds. US Treasury Government Bonds saw their largest quarterly decline in 40 years, justifying our light stance with so-called ‘riskless’ bond investments. (Nothing is riskless if you overpay).

It was not only conventional Bonds that fell in value. ‘Bond proxy’ defensive equity instruments such as Consumer Staples, Utilities and Infrastructure stocks also struggled, as did Gold, despite the longer-term arguments for the yellow metal in the event of heightened inflation prospects. But in the short-term, the defensive stance lost that tug of war.

Turning to global stock markets, our taking of pole position on vaccines meant that British stock markets powered ahead against global yardsticks.  For a similar reason, US equities also outperformed, despite their heavy Tech and Healthcare weightings – other areas did the heavy lifting.

In currency markets Sterling rallied, while UK Small and Mid Cap stocks outperformed to an even greater extent than the FTSE 100. Sterling assets look like they are beginning to play catch-up after being left on the ‘naughty step’ in recent years.

In the Emerging Markets, Brazil and India look to be under immense stress from surging infection rates and hospital infrastructures struggling to cope. Unlike their developed market counterparts, general rising indebtedness levels in the emerging world could potentially pose more serious financial credibility problems. Large developed Western countries have the keys to the printing presses, whereas emerging countries have traditionally faced little choice but to keep their houses in order otherwise they run the risk of traditional financial crises. Ensuring that those in the developing world receive access to vaccines will be critically important in avoiding this fate at a difficult time for their people and economies.

On the other side of the Channel, political bickering and inaction in Europe looks to have presented the real risk of a third virus wave across much of the continent, in contrast to the proactivity demonstrated in the US and UK. Asia also looks to have the virus and economic situation largely contained, highlighting yet again the case for regional diversification within investment portfolios at all times.

Wrapping up, financial markets have continued to progress to dizzy new heights, hitting new peaks on many international stages. This has been fuelled in part by optimism and also due to the immense global fiscal stimulus packages that have been put in place, leaving the financial system awash with cash. The inflation hawks and gold bugs are starting to speak up as expectations for higher prices creep in.

Stock and bond market valuations are both on the high side, albeit there is polarisation between the various camps. The real elephant in the room would be that unexpected inflation could threaten equity and bond markets simultaneously. Given the risk posed by this dynamic to traditional bond and equity portfolios, we are mindful of the need to remain vigilant on this count.

It would appear that 2021 has got off to a very good start, but by summer we are likely to be in a position to know whether that bullish optimism today can be justified by the data. Fingers crossed that it can.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Investment Update – Summer 2020

The disconnect between unstoppable financial markets and deteriorating global economic fundamentals continues to widen as the world maintains its efforts to manage the spread of COVID-19. If anything serves to remind us that the stock market is not the economy, this is certainly it.

The huge stimulus packages put in place by the authorities – for example the US Fed policies measured in $ trillions and the latest €750bn European recovery package – have, in effect, put a floor in place for financial asset prices, creating a tide of global liquidity.

Much of this wall of money – hot off the financial printing presses – is finding its way into global asset markets, pushing many stock and bond prices close to pre-virus highs and, in some cases, beyond.

This apparent resultant steadiness may, on the surface, suggest that things are returning to normal, but financial market professionals know that there are notable lessons from historical bear markets that we must observe. When the authorities put a floor in place (especially via co-ordinated action from multiple central banks) despite dismal news and outlook, asset prices tend to then find the potential to recover, laying the foundations for moving on and this same pattern is presenting.

Meanwhile, in the ‘real world’, it is becoming evident how differing virus containment strategies (to simplify) have led to diverging outcomes between countries eg. US deaths are looking of great concern in comparison to those in Europe, while trends are also worrying in India and Brazil.

On the whole, mortality statistics would suggest, positively, that knowledge on how to contain the virus and slow its spread/impact appears to be increasing. Although it could be argued that perhaps with wiser, older generations being understandably more cautious and sensibly staying at home, they are keeping out of trouble and away from the grimmest category of the published statistics.

Unfortunately, the risk of economic health being placed ahead of the literal health of citizens is a disappointing but inevitable outcome in many instances. When the economic stakes are so high, the show must go on, when perhaps it shouldn’t.

It is often written that the virus has imposed dramatic technological progress and engagement upon us all. The anticipated sedate adoption over  multiple years of home working, Zoom meetings, online consultations with doctors and to some degree  obsolete shopping centres and fully manned offices are just part of our ‘new normal’ when previously they would have been seen as radical jumps. While this is true, the immense polarisation this is creating is leading to a widening gulf between investment winners (Tech, Healthcare, Gold) and losers (to oversimplify, anything else). Having said that, we note that the rising tide has lifted even the losing boats, albeit not by as much.

Markets are knee-jerking to vaccine hopes although for the most part, cheaper, out of favour recovery stocks (‘Value style’) are facing ever greater risks. Zero sales revenue is a new scenario that few, if any, analysts had seriously modelled in recent times, threatening the financial viability of even some big, ‘grown-up’ companies.

This outcome has sadly hurt our portfolios given our long-term tilt to cheap stocks (based on long-term history and the merits thereof) and we have naturally had to make some difficult assessments and cut losses in places as we look to draw a line and adapt where it is the right thing to do.

With Government Bond rates now essentially pinned at zero across the developed world, money has fewer safe places to hide than ever, that is if you wish to receive a return at the same time.

Logically, Gold looks to be the next ‘safest’ place if Government bonds no longer offer a return. This probably explains much of the yellow metal’s ferocious rise year-to-date with related gold mining stocks rising at an even faster pace.

It is entirely possible that a ‘gold bubble’ could follow given the wall of money and long-term fundamental case for escaping debt-ridden fiat (Government-issued) paper currencies like Sterling, Dollar etc. over the decades ahead. That said, perhaps the gold market might have run a bit hot in the near-term and progress with a vaccine could certainly reverse the sentiment for ‘fear assets’. Nothing ever moves in a straight line.

Back in Britain, the authorities are desperately looking to stem the leaks from the bucket by plugging dozens of multi-billion pound holes with economic stimulus. It certainly seems far too early to worry that the bucket will overflow pushing up inflation. However, Brexit concerns are still afoot and the usual late night poker antics are surely inevitable at the negotiating table while the political stakes remain so high.

The FTSE 100 index continues to prop up the table of global stock indices given its multiple out-of-fashion characteristics and highlights the importance of having a global investment portfolio.

In conclusion, the risks of being very right or very wrong are higher than ever and we are unwilling to take big bets on the future market direction from here and instead are seeking appropriate ways to hedge against varying scenarios.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Business Owner? What’s your ‘£’ number?

As a business owner are you building something of value, a business that one day will make a material difference to yours and your family’s financial security?

How would you define financial security?

How are you defining success? Is success a financial destination or is it living the life you want and being who you want to be for as long as you can?

It could be argued financial security is a destination but sustaining it is a journey, a tough journey that many do not manage well. I’m sure many of you know of those who once had millions and now have not very much left, we make mistakes, we are taken advantage of, we chase returns we do not need, we lose focus on what our short life is about and before we know it we are ‘old’.

Let’s say you’re 50 years old, in 240 months’ time you will be 70!

Time and tide wait for no man

It can be difficult to know what to focus on. If you’ve not heard of The Four Burners Theory then this is a must read. It’s about life being based around a set of trade offs and suggests an alternative solution to the work-life balance problem.

Many business owners might have an affair with their business over many years, a business to be super proud of and go on to achieve financial security without even exiting their business, yet some of these owners might not consider themselves successful in life.

Why is that?

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Focus on the goals not the how

A big part of my job is building Financial Plans for clients. It surprises me how many people find it hard to think about their long-term future. Possibly because they’re busy but also they’ve probably not been asked this before!

It can be tricky to think of genuine motivational goals – for example ‘I want a level of financial independence by my mid 50s that means I can semi-retire’ – if you can’t work out how this could be achieved.

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What does ‘good’ look like?

That’s the challenge for those seeking advice. If you’re a potential client, how do you differentiate between ‘mediocre’ and ‘good’ or ‘really good’?

I’ve been reflecting on this and realise that my focus always comes back to individuals, not firms. As a financial planner, I’ve collaborated with many professionals over the years and they do seem to fall into one of two camps.

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