Church House Investment Management’s Sam Liddle shares his macro perspective with Wealth DFM
There is a very interesting dynamic playing out across global financial markets.
On the one hand, we are seeing a growing light at the end of the tunnel in many economies. Both the corporate and political worlds are gaining better visibility in the return to “normality” as increasing numbers are vaccinated against Covid-19.
On the other, growing evidence is suggesting the continued recovery will by no means be plain sailing. There’s the lingering uncertainty around coronavirus and new variants, of course, but we have also seen a flurry of unusual shorting activity and a rise in certain bubble assets threatening to drive disruption over the last few months.
Up or down?
Let’s start with the good.
Globally, the fight against coronavirus is approaching terminal velocity. Well over a billion doses (and counting) have been administered globally across 176 countries[1].
This, of course, is excellent news that will help to save many lives but it is also reassuring from an economic perspective.
In the face of turning tides, we believe that the risk of negative interest rates – which was becoming an increasing concern – has largely dissipated.
In the UK, the Bank of England had warned that such measures would fail to boost the UK economy.[2] Meanwhile, its counterpart in the US – the Federal Reserve – had also resisted the notion on multiple occasions[3].
Elsewhere, some have expressed concern of a growing stock market bubble with valuations increasing across the board.
We agree that stocks do look expensive on the face of it, but this is hardly unexpected; after all, price to earnings ratios usually rise when economies begin to emerge from recessions, and this has been a recession like no other.
Whereas most recessions are usually drawn out and result in painful job losses, this one has been quick and government intervention – particularly in the UK – has largely sustained employment as the latest figures revealed on 18th May 2021 show[4]. The result is a huge amount of pent-up demand in both the private and the corporate sectors that is likely to translate into a vast degree of earnings recovery potential.
We expect to see well-run, cashed-up companies that have weathered the lockdown woes – Young & Co. brewery, for example – to enjoy an enormous turnaround in their fortunes as the economy recovers and punters flood back to indoor drinking and eating again.
However, we’re not out of the woods just yet.
The vaccine rollout may now be in full swing, but early problems in securing access across Europe have delayed recovery.
There’s also the ongoing risk of new Covid-19 strains, particularly the virulent Indian variant we’re seeing now, and potential follow-on waves of infection as economies reopen.
Pandemic aside, there is cause for concern on Wall Street too.
The rapidly accelerating emergence of Special Purpose Acquisition Companies, or SPACs, looks to us like obvious bubble territory. And then there’s the well-covered squeeze by social media users of stocks such as GameStop that have been shorted by hedge funds.
These factors, in combination with a slowdown of growth, run the risk of creating some volatility over the next nine to twelve months.
Positioning
From a multi-asset investment perspective, caution is the watch word in these markets. For example, we have positioned the portfolio of the Church House Tenax Absolute Return Strategies Fund to account for both a long-term recovery and short-term volatility.
We don’t see much risk of a rising rate environment for some time. Rhetoric from the BoE suggests that such a move is not on the cards for the foreseeable future in the UK.[5] Meanwhile, Fed chair Jerome Powell has gone to great lengths to stress that the US central bank will not raise rates at the first signs of a strong labour market.[6]
That said, the fact is, rates will eventually rise – its part-and-parcel of recovery.
To account for this, we have kept our corporate bond duration short, at around 3 years. We also hold a considerable allocation (34.3%) in floating-rate notes, which have no duration risk and are therefore insulated against rising interest rates. In fact, because their rates reset in line with the Sterling Overnight Index Average, they actually benefit from rate hiking.
As well as protecting the portfolio, the highly liquid nature of these holdings will allow us to make the most of any spike in volatility, to snap up some bargains as we did last year in bond and equity markets.
The bottom line is we are positioned for economic recovery while giving ourselves the space to make the most of residual volatility. In doing so, we believe we will be able to maintain the consistency that has enabled us to protect the value of the portfolio throughout the pandemic.
Sam Liddle is a Director at Church House Investment Management
[1] https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/
[2] https://www.theguardian.com/business/2021/jan/31/negative-interest-rates-would-not-help-covid-economy-bank-of-england-told-mortgages
[3] https://www.reuters.com/article/health-coronavirus-economy-rates-idUSL8N2KA3ZH
[4] https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms
[5] https://www.ft.com/content/0ca97eb2-a3a8-4bfd-a2df-034c73b5a0e3
[6] https://finance.yahoo.com/news/powell-fed-will-not-tighten-policy-until-low-income-workers-recover-190004982.html
