- How a pharmaceutical breakthrough turned markets upside down
- What can crash the “opening up” market boom?
- Yesterday’s losers are today’s winners, and vice versa
- UK equity funds have their day in the sun, but retail investors aren’t buying
- Best and worst performing fund sectors and FTSE 100 stocks since the arrival of the Pfizer jab
- Funds for a booming economy
Laith Khalaf, financial analyst at AJ Bell, comments:
“It’s now six months since Pfizer announced the success of its vaccine trials, a moment which marked a hugely significant victory in the battle against the coronavirus. Here in the UK, the economy is now beginning to open up, and a strong recovery is expected this year. Looking back, the arrival of vaccines clearly prompted an inflection point in markets, which saw investment trends swivel on their heels, and start marching in the opposite direction.
“The stocks and markets which had been worst hit by the pandemic suddenly found themselves in demand, as investors looked forward to the grand reopening that vaccines promised. By contrast, the crowded havens investors had flocked to over the course of 2020 began to see performance dip, as investors reassessed their prospects in a post-pandemic world, where medicinal science will hopefully allow a gradual return to business as usual.
“The rebound in riskier, more economically sensitive areas of the market has been sustained by successful vaccine rollouts in the US and the UK. It continues today, even though many parts of Europe are still enduring heavy social restrictions. That’s because the market is looking forward to the landscape later this year, when the vaccine roll out should be at an advanced stage across most leading economies.
“It’s not unusual to see a changing of the guard in markets after the nadir of a sell-off, indeed banks were some of the best performing stocks in the aftermath of the financial crisis in 2009. What is perhaps more significant is that the arrival of vaccines has prompted a reversal of trends which were entrenched long before the pandemic, as the longer term performance figures suggest. The hegemony of reliable, secular growth companies and safe havens has been disrupted, and the ostracism of cyclical stocks rescinded, for now at least. The inflection point prompted by the arrival of effective vaccines is naturally clear to see with the twenty-twenty vision of hindsight, but the outstanding question is, as ever, where markets go from here.
“There are factors which could yet bring the reopening boom to a grinding halt. A resurgence of the pandemic later this year, due to low vaccine efficacy in reducing transmission, or an evasive variant, could see further lockdowns in winter, and a flight back to safety by investors. The economic rebound may not be as robust as expected, if consumers continue to play it safe after an initial bout of revelling, which could bring company profits in below expectations, and moderate demand for riskier areas of the market. Or the pandemic may throw an unforeseen curveball which derails the best laid plans, one of those intangible ‘unknown unknowns’, to coin a phrase of the former US Defence Secretary, Donald Rumsfeld. In stock markets, it’s the unknown unknowns that tend to have the most damaging effect if they materialise, because the risk isn’t priced in until it’s too late.
“While investors shouldn’t ignore these downside scenarios, the central case remains a gradual reopening of the global economy as vaccines steadily bring the pandemic under control. As well as the natural economic rebound prompted by raising the shutters, there’s plenty of dry powder lying on the ground from all the fiscal and monetary stimulus that has been thrown at the crisis, and that could fan the flames even higher.
“The strong performance of previously unloved areas of the market may well start to attract momentum investors too, including the vast wall of passive money that now flows into markets based purely on index weighting. Momentum investors are fickle beasts, they don’t care what horse they’re riding, as long as it’s got a bit of speed up. So as the improved outlook for economically sensitive stocks manifests itself in the performance data, we could see this snowball increasing in velocity as it hurtles along.
“A balanced portfolio includes a blend of cyclical and defensive areas of the market, so investors shouldn’t bet the house on the reopening trade. But given the strong performance of some areas of the market in recent years, investors may find their portfolios are out of kilter, and ill-prepared for a leg of market performance that strongly favours more cyclical areas of the market, and indeed, a resurgence in the UK stock market. Some readjustment may well be in order, to get ready for a post-pandemic market.”
Yesterdays losers are today’s winners
Some of the best performing fund sectors since last November, when Pfizer made its ground-breaking vaccine announcement, were previously at the bottom of the performance tables up to that point, not just since the pandemic hit, but over the preceding three years. The three main UK Equity sectors have been the best performers since November, a sharp reversal from the previous three years, over which period they are languishing at the rear end of proceedings. Sitting in slots 4 and 5, European funds and Global Equity Income funds have also enjoyed a reversal of fortunes since news of the Pfizer vaccine broke. North American funds have been consistently good performers, and likewise the popular Global sector, which has a high exposure to US equities.
At the other end of the spectrum, some of the sectors which have performed worst since last November, had previously enjoyed cherished positions in the performance tables. Most notably bond funds have fallen on hard times. In the three years to November 2020, UK gilt funds had posted a return of 18.6%, the third highest of any sector in the sample. Since November, these funds have on average returned -6.3%, which is probably a bit of a shock to investors who had invested in these funds because of their reputation as a safe haven. Corporate bond fund sectors have similarly plummeted down the performance tables. Property and cash have been poor sectors to be invested in both before and after the emergence of successful vaccines.
Table 1. The table below shows the performance of Investment Association fund sectors, excluding niche sectors with less than £10bn of assets invested in total. Three periods of performance are displayed:
from 1st November 2020 to 12th April 2021 (just before the Pfizer announcement to date) from 1st January 2020 to 1st November 2020 (the pre-vaccine pandemic period)
from 1st November 2017 to 1st November 2020 (the three years preceding the vaccine announcement)
Full table is available on request.
|01/11/2020 to 12/04/2021||01/01/2020 to 01/11/2020||01/11/2017 to 01/11/2020|
|Investment Association Sector||Total return||Rank|
|IA UK Smaller Companies||36.7||1||-11.9||23||-1.0||23|
|IA UK Equity Income||31.2||2||-25.6||26||-19.0||26|
|IA UK All Companies||29.7||3||-21.1||25||-13.1||25|
|IA Europe Excluding UK||23.7||4||-5.8||21||-1.3||24|
|IA Global Equity Income||20.8||5||-8.1||22||4.4||17|
|IA North America||20.3||6||5.9||3||33.2||1|
|IA Sterling Strategic Bond||2.8||21||3.1||7||10.4||7|
|IA UK Direct Property||0.5||22||-3.6||17||1.8||19|
|IA Sterling Corporate Bond||0.4||23||4.5||5||13.3||5|
|IA Short Term Money Market||-0.1||24||0.1||10||1.0||20|
|IA Global Bonds||-1.7||25||5.8||4||11.3||6|
|IA UK Gilts||-6.3||26||8.4||1||18.6||3|
*Source: AJ Bell, FE, Investment Association; total return, IA sectors with less than £10bn total assets excluded
Best and worst performing FTSE 100 stocks
As well as a shift at a broad market level, there has also been a rotation in leadership within the FTSE 100 Index. Travel stocks, housebuilders, mining companies and financials have all prospered since the announcement of the Pfizer vaccine, after largely bringing up the rear of the performance tables over the three previous years. IAG is the best performing FTSE 100 stock since last November, but in the previous three years, only Rolls Royce performed worse, posting a 75.6% loss compared to IAG’s 51.6% plunge into the red.
|01/11/20 to 12/04/21||01/01/20 to 01/11/20||01/11/17 to 01/11/20|
(out of 100)
(out of 99)
(out of 97)
|International Consolidated Airlines Group||114.0||1||-76.7||99||-51.6||96|
|Intermediate Capital Group||70.8||6||-25.0||63||34.2||28|
Source: AJ Bell, Sharepad total return, best 10 performing FTSE 100 stocks since 1st November 2020
Again, many of the stocks which have performed worst since the vaccine announcement were those which prospered when the pandemic hit, and indeed in the previous three years. Ocado was the best performing stock in the FTSE 100 in the three years leading up to the vaccine announcement, yet it ranks in the bottom 5 performers since November 2020, with a 7.7% loss over that period. The precious metals miner Fresnillo has gone from the very top of the performance table in the first ten months of 2020, to the very bottom since the vaccine announcement, as appetite for the sanctuary of gold has waned in the warm light of vaccine optimism. Fresnillo investors are still comfortably ahead since the start of 2020 however.
Perhaps surprisingly losing out since vaccines arrived are Astrazeneca and Hikma Pharmaceuticals. Hikma performed well with the pandemic struck, but more recently it’s been left behind by the rest of the market after a delay to the launch of its generic alternative to Advair, GSK’s blockbuster asthma drug. As for Astrazeneca, it’s barely been out of the news for the last six months, but mainly not for the right reasons, having become a political football in the international tussle for vaccines. Despite having produced an effective, transportable vaccine at breakneck speed, any goodwill for providing it on a not-for-profit basis looks lost in translation, and concerns over rare blood clots have dampened appetite for the stock too.
|01/11/20 to 12/04/21||01/01/20 to 01/11/20||01/11/17 to 01/11/20|
(out of 100)
(out of 99)
(out of 97)
|Reckitt Benckiser Group||-2.4||91||13.8||17||11.3||40|
|London Stock Exchange Group||-9.4||97||7.76||23||126.0||3|
|Just Eat Takeaway.Com||-14.2||99||N/A||N/A||N/A||N/A|
Source: Sharepad total return, 11 worst performing stocks since 1st November 2020 are shown rather than 10, as Just Eat Takeaway.Com lacks longer term performance figures (it listed on the LSE in February 2020).
Funds for a booming economy
The UK’s stock market has lagged behind international peers over the last decade or so, largely in part down to its cyclical make up, with high exposure to oil, mining and financials, industries where peaks and troughs can be regular and extreme. But this curse can become a blessing when markets are rising based on expectations of economic expansion, as the recent performance figures above show.
However, at the same time, investors have been fleeing the UK stock market in droves, for the last five years, and even now that shows no signs of abating. According to Investment Association data, in February 2021, investors withdrew £1 billion from UK equity funds. But that was just the tip of the iceberg; looking back further, private investors have withdrawn £18 billion from UK equity funds since 2016, and they have invested £20 billion into global funds instead.
A balanced portfolio should be spread across geographical regions, and also across value and growth styles, encompassing both cyclical and defensive industries. After years of plumping for global growth funds, some investors may find themselves lacking in exposure to UK, value, and cyclical areas of the market, in which case the following three funds could help address that balance.
Jupiter UK Special Situations
Manager Ben Whitmore is a strict disciple of value investing, which has been out of favour for the last decade, but if there’s a continued rotation in markets, this fund should benefit. He looks to add an element of security to a pure valuation approach by screening companies based on balance sheet strength. Top 10 holdings include Aviva, BP and NatWest.
Franklin UK Mid Cap
Fund manager Richard Bullas runs a concentrated portfolio of 30 to 40 medium-sized companies he’s identified as having quality finances, but which are trading at attractive valuations, with a particular emphasis on cash flows. Mid caps have been the best performing area of the market over the last year, and while the FTSE 250 index has just hit a record high, medium-sized companies should be well-placed to benefit from a domestic and international economic expansion.
Man GLG Undervalued Assets
Fund manager Henry Dixon invests across the market cap spectrum looking for unfashionable companies which he thinks the market has undervalued, and which are paying a sustainable dividend to investors. One of the attractions of the UK market, and indeed the cyclical sectors within it, is that companies often come with a healthy dividend stream attached, which can be drawn as income, or rolled up for further compounding. Clearly last year saw dividends chopped as the pandemic hit company profits, but as profitability recovers, dividends should too. The current yield on this fund is 4.3%, as ever – variable, and not guaranteed.