The Coronavirus panic has changed quite a few things in its short life.
We no longer stand within two metres of each other without being forcefully reminded to move apart, we no longer seem to mind washing our hands several times per hour or the restrictions being placed on our everyday lives in the name of “flattening the curve” , whilst governments across the world have awoken from their apparent apathetic attitude towards the economy’s performance.
The latest US and UK stimulus packages, in addition to the usual Central Bank monetary responses, cutting rates, printing more money, provided banking system liquidity infusions, are now leading governments into the realm of fiscal policy or state spending; it is almost as if the Coronavirus has decided that we were to have a UK socialist government irrespective of the last election result.
Things are getting wilder by the day - it is said that markets stop panicking when Central Banks start panicking, and it appears that they have now done so. According to Goldman Sachs, there have been 14 days in the last 23 when the S&P 500 has moved up or down by more than 3%, the highest concentration since 2009.
The moves in US equities for the last week have been, shall we say, unusual.
12/3: Limit Down
13/3: Limit Up
16/3; Limit Down
17/3: Limit Up
18/3: Limit Down…
As unexpected shocks go, Coronavirus ranks in the very top tier of events capable of disconcerting investors, amongst the Great Financial Crisis (GFC) and Black Monday. Whilst news continues to horrify many investors with the human and economic implications, buried in the latest data in what statisticians refer to as “the inflection point of a logistics curve”, is a sign that the very worst may be over.
- February news was dominated by the global spread and impact of the Coronavirus (Covid-19). Dow Jones, S&P 500 and the FTSE All-Share fell by over 14%, 12% and 11%. So far in March (16th March 2020), these Index markets have been continuing their decline and the correction has now developed into a full-scale bear market.
Technology stocks are the top dogs of the stock market. For the last 6 months or so, they have risen almost without a pause and have become a greater and greater influence on the direction of the overall stock market. Last month, the big four MAGA stocks (Microsoft, Amazon, Google (Alphabet) and Apple) reached the point where they represented over 17% of the total S&P 500, and contributed almost 70% of the gains attributable to that Index in 2020 alone.
How did they get this big and thus so influential on both the stock market and the wider economy? There was of course a lot of hard work, plus some innovative ideas, but they had a few advantages that were (mostly) unavailable to other firms. If you want to become a “tech titan”, some or all of the following tailwinds need to be behind you.
The information on this page is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. It is not intended for retail investors.
It has been an “interesting” week. In the space of just 6 trading days, the Dow Jones Index went from all-time highs to a “correction” (defined as a 10% fall from a high point). Reportedly, every continent on the globe is now infected (apart from Antarctica) and there have even been deaths in high political circles- for now in Iran, but other senior government personnel in other countries will inevitably follow, which may concentrate minds at decision-making level.
Returns to the Value factor continue to disappoint. Against Momentum it has been almost one-way traffic for the whole of 2020, whilst in the longer term, we are now approaching the low point (for Value relative to Growth) reached in 2000 as per the Russell 1000 Index. [The Russell 1000 Index represents the 1000 largest capitalisation firms in the US]. Brief spikes in Value (as seems to be happening currently) last only a few days, before the selling resumes anew.
[Note: the chart below plots Value against Momentum, not growth; but a nearly all the highest momentum scoring shares ARE growth shares, they amount to one and the same].
In case there should be any doubt, it IS a global phenomenon; only US Value has beaten the MSCI World Index, and all major Value regions have even lagged long-dated UK Government bonds, which are a risk-free asset.
Harold Macmillan, the UK Prime Minister between 1957 and 1963 was reputed to have replied “events dear boy” when asked what the most likely thing would be to knock his government off course. With the increased focus on Sustainable and Socially Responsible investing it now seems that there is significant “event risk” involved in running a company in contravention of these principles and the bigger and more high profile it is, the more dangerous things can get.
The world seems more than ever eager to take offense. What would once be dismissed as a joke or mild criticism is now portrayed as something akin to assault, regardless of the intent behind the statement. The resignation of Alastair Stewart in recent days as a result of a (somewhat concocted) row on Twitter with another user is but one in a long list of the famous who have been brought low by controversy.
EBI Portfolios adopt a buy and hold strategy, which means that one year performance is not a sound basis for decision-making with regard to asset allocation etc. However, we recognise that clients wish to know how their assets are performing and so a yearly review is undertaken to allow them to understand the sources of returns; it is not always possible to discern the rationale for why millions of investors (most of whom are much better informed than we are) do what they do, so any interpretations offered here are just that-interpretations- and may be in error. But taken as a rough guide, it may help investors to better understand how markets have performed in 2019. On the basis that any information is better than none at all, we offer the below.
EBI’s ESG-integrated portfolios are now live. To mark the launch and in the run up to 2020, it’s an opportune moment to look back at the series of ESG blogs we have run over the last few months and to summarise the key takeaways for financial advisers.
Firstly, demand for passive solutions is soaring. As previously mentioned, an ETFGI report found that global ESG ETFs/ETPs assets increased by almost 30% in 2018 ($7.6 billion in net new assets) whereas assets in equivalent non-ESG funds grew by less than 5% in the same period.
Is ESG therefore a fad, with ETF providers jumping on the bandwagon? As we’ve discovered, there are ETFs for almost every whim nowadays – including a ‘vegan’ ETF which still has a heavy proportion invested in tech stocks.
From time to time both ourselves and our clients get contacted by journalists looking for quotes and views on the debate surrounding Active and Passive Investing, which (usually) revolve around asking us what our investment approach is, or how we use the two types of investment strategies for our portfolios. So, in order to formalise our response and to give clients an idea of how to respond should they receive similar enquiries, we decided to put our views down “officially”, in the form of a Q&A.
The concept of “satellite and core” is a key discussion among financial advisers when it comes to portfolio construction. In essence, core investments make up a bigger proportion of long-term invested assets, and tend to be passive funds, while the satellite can perhaps include some riskier or more exotic active investments for the shorter term and tactical plays.
This model is designed to lower costs, be more tax efficient, minimise volatility and provide some opportunity to outperform the markets - and it can be applied across investment vehicles, strategies, and asset classes. (Although it’s not to be confused with the typical way we talk about equities versus bonds - say, 60% for the former and 40% for the latter for a typical medium-risk portfolio - because both are typically longer term.)
And this is where ESG comes in. So, do you hold ESG at the core or satellite?
More than two years ago, we discussed the rise in social unrest across the globe as nations start to split apart. This has got much worse since then and it appears to have become generalised as the cleavage between populations has now spread to families. Why now and how will it all end?
Fund providers have an almost miraculous ability to create products that follow the news cycle. Index-linked funds (due to worries around inflation), robots and automation (robots taking over our jobs) and gender diversity ETFs (tapping in to Sheryl Sandberg’s ‘Lean In’ revolution). Gender diversity, hopefully, will be a lasting focus for investors, while internet-focused funds, which launched in the 1990s and early 2000s, had a seriously rocky start.
No matter an investor’s principles and good intentions, ESG is prone to the same marketing whims and opportunism of fund providers as much as any other investment sector. And just like any other sector, ESG funds are also at risk of being overpriced, especially if a fund provider claims to launch a ‘first of its kind’ and therefore has no competition. ESG or not, a fund provider is a business, and its main aim is to profit.
A pub quiz question- what has been going on for more than 3 years, amid much frustration and bemusement to all involved, having got nowhere at all during that time and is not Brexit?
Just like the debates around active versus passive funds or the definition of smart beta, the concept of environmental, social and governance-focused ETFs is hotly debated.
ESG has come a long way. What started in the 1960s as stripping out tobacco stocks has evolved to other areas like gender equality, green bonds, social impact investing and more. ESG, to a certain extent, has also had to keep abreast of societal changes, removing increasing numbers of stocks and sectors as time goes on, from companies that derive most of their revenue from arms sales to companies that benefit from practices such as child labour.
One could argue that good ESG starts at home, and not just with a product range. As demand and awareness around environmental, social and governance factors grow, ETF providers are under increasing pressure to showcase their own good practices.
Fund houses will also have to become more transparent on ESG, whether they like it or not. By 2020, the European Commission will require investment houses to disclose how they integrate ESG opportunities and risks into their processes to stop funds being labelled as ESG when they normally wouldn’t qualify - otherwise called ‘greenwashing’.
In the context of financial markets, Repo's refer not to repossessions but repurchase agreements. This is the process whereby banks who are (temporarily) short of money can borrow from those who have excess cash so that they stay within their legally required reserve requirements. Generally, the interest rates charged are that of the prevailing Fed funds rate, which s currently in a range of 1.75-2%.
Under the ESG umbrella, there is another category that pertains more to the ‘S’ and ‘G’ letters – gender equality.
Given the rise of movements like MeToo and TimesUp, there is increased recognition and acceptance of gender equality and diversity at work. And thanks to UK government-backed initiatives like the Women in Finance charter, the Alexander Hampton review, which aims for 33% women on boards of all FTSE 350 companies by 2020, as well as mandatory gender pay gap reporting for companies with more than 250 employees, gender equality has become less an esoteric aim and more mainstream.