Phil: Hello and welcome to the may episode of monthly market insights I’m Phil Attreed, Barclays Head of Investment Consulting, and once again I’m joined by Will Hobbs, our Chief Investment Officer, as we're going to look at what's been going on in the world of investing.
So, Will, we've made it past the first May bank holiday and the vaccine rollout in the UK thankfully continues at quite some pace. And it's also been a really positive few months actually for investors as well with stocks in developed markets in the developed parts of the world further surging after what was already a pretty impressive recovery from last year's slump. It's interesting to see the leaderboard also within this group a little different from recent years both in terms of the sector and the country performance.
So UK stocks are very much leading the way a touch ahead of the US with Energy and Financial sectors in particular performing well; they're definitely the areas that are out in front. Now I guess there was a little bit of lost ground to make up here, but, Will, is it also the case that there's maybe been a bit of a change in investor expectations. Is that what's influencing where the money's being allocated?
Will: Yes, certainly Phil, you and I have spoken about this before but the nature of the recovery so far, the nature of the change in expectations get a little bit tangled up this year is influential I think because what you've found is that with that giant surge in demand, we really are seeing a boom at the moment.
You're seeing big upgrades to we've seen the US in terms of expectations, in the UK this week the Bank of England suddenly talking about a much faster pace of growth this year, and with that has come not only well, in part prompted a surge in commodity prices, diversified commodity prices, that's been helpful for the UK and because it indexes quite heavily, it's got a big exposure to the commodities index energy and commodities. And the other thing that's happened with that in a sense, is: a, the surge in demand and much better growth that you're seeing from the global economy has forced people to revise the path of interest rates a little, bit expected in the future.
And you found bond markets revising up and it's also forced people to revise their expectations with regards to inflation a little bit. Those things have been helpful to us in some part to the financial sector. So two until relatively recently out-of-favour sectors are now at the moment quite popular again and what that meant is that because the UK is quite got majors on those two sectors, the UK FTSE, it's been one of the leaders so far.
Phil: Quite. So the question may be on many of our listeners minds is: do we actually expect the UK to continue to lead the way for developed markets in the months ahead? Companies trading on the UK FTSE indices certainly feel like they've quite a lot of lost ground to make up from recent years certainly post that UK referendum
Will: Yes, it's hard to say how much the referendum played a role here. I mean certainly there was I think that some people argued that the sharp fall in sterling was a deterrent to some international investors looking at exposure in the UK in some instances.
It’s difficult to say but I think there were some plausible arguments that international investors were underweight the UK post, a little bit underweight the UK and some of that has been corrected since. With regards to will it continue I’m afraid I've got a bit of a buzz kill answer here. We obviously spend a lot of time at looking at something called return predictability and that is: if you pour your intellectual energies into trying to work out which area will outperform or where to allocate more, which areas show some sign of reward for pouring those resources into that particular area. I’m afraid countries and styles is not really one of them.
Country sectors and styles, they don't tend to show much return predictability so I'd be wary of those who would tell you too confidently what country, sector, or style is going to come next. Like I say we spend a lot more of our time focusing at the asset class level where there is in our opinion a little bit more return predictability. You can look at a set of indicators and follow the signals and allocate according to the signals a little bit more and make relative money as a result.
But like I say countries is not one of those areas. So really the UK is just part of that diversified mix and we would say that it certainly looks attractive within that diversified mix but whether you should be allocating more now than you would normally I'd be a little bit sceptical of that.
Phil: And so in terms of the broader economic outlook, the first five months or so of the year, it's surely going to be pretty hard to repeat as we look to the remainder of 2021. I mean the world economy probably can't continue to accelerate at quite the same pace that we've seen during what we would, I suppose, see as the recovery phase but is it also the case that maybe investor sentiment is also looking equally frothy, across the range of indicators that you and the investment team watch and dare I even mention Sell in May as the saying goes?
Will: Yes, Phil – annually, we get this don't we yeah and it's right. The reality is it's bizarre in my opinion and we still haven't got a decent explanation for it but returns are lower over the summer persistently than they are for the rest of the year and people can't really explain why, not since all the City used to depart for the racing season was that ever the case. So yeah it's there.
But I would say that from that point that returns have still tended to be positive over the summer from stock markets, just a bit less positive than they are for the rest of the year. And you're right about some of the other factors. Yes the the growth impulse should peak at some point; maybe it's already in the process of peaking. It should peak over the summer and we've got to be aware that we're a long way from out of the woods with this pandemic.
Yes the situation in the UK and the US and Europe is improving but actually if you look at it globally, actually we are now at a record case count for the entire pandemic globally and in a couple of weeks’ time we're likely to see a peak in deaths, I mean the highest deaths from Covid, so we're a long way from out of the woods even if there is some success stories to tell.
And I think the point about investor sentiment is well made as well. Yes people are, I wouldn't say they're giddy on our measure anyway, but certainly you would argue that there is less cushion for unexpected bad news than there was a few months back. People are just expecting a bit more so yes, I think that the summer does look like it's you could be a bit more calmed in terms of returns but I wouldn't go much further than that to be honest.
And I'd still say, obviously this is a self-serving response, but we get back to that strategic argument which is that it doesn't mean you should delay investing your assets, your overall assets. That is very much a tactical view and the tactical views are held at the edges of your portfolio because that’s all the conviction you can muster in that short-term view.
Broadly speaking, the fact that we may well be entering into the fourth industrial revolution, what many are terming, this giant industrial transformation that people are talking about. That is a reason to be invested every day. The more days you give yourself exposure to that potential, the luckier you are likely to be in terms of your long term results.
Phil: I mean, I tease you with that saying but it's always amused me since coming into the industry some nearly 25 years ago, the thought that world markets should pause their activity whilst the UK’s horse racing season takes centre stage, I mean it's an interesting investment strategy but it is really funny how these things can stick and I know Rob Smith has lots more to say on that point from a behavioural standpoint.
But setting gambling aside, have the team been making any changes to our tactical positioning as a result of some of the current market levels and an economic news flow that we've been seeing in the last month.
Will: Yes, so we had a position. It was more of a relative value trade in many ways. We had an overweight to developed market stocks and and that was paid for by an underweight to high-yield credit people call it “junk” credit, and it was really just that we saw a better range of outcomes for stocks versus high yield. Now actually that played out to some degree.
You found that actually that added some performance to portfolios, that position. We've narrowed it now a little bit, so we've taken away a little bit of stock exposure and we've actually put some of that, we've also closed an underweight, well we've added a little bit back to government bonds which have obviously sold off quite heavily so far this year.
So I would say the overall tenor of the tactical portfolio is slightly less risk on; it wasn't very risk on any way. There's many less positions than there were at some points last year for instance. But we're slightly less risk-on than we were but obviously always still looking for opportunities to add value.
Phil: Fantastic. Thanks so much, Will, always interesting to get your thoughts and thank you our viewers and listeners for joining us today. If you would like to hear more from us before the next Monthly Market Insights, please do seek out our weekly podcast Word on the Street, where we share all of our latest views on developments in the world of investing. Otherwise, Will and I very much look forward to being back with you next month.