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- I believe before the end of the year there will be better opportunities to buy equities
- There is the expectation that governments will continue to step in to help both businesses and the labour market
- The disparity between the US and European equity market performance has been stark – especially when looking at the Nasdaq
August is typically a quiet month that can see some kneejerk reactions in equity markets and spikes of volatility. Given the current macroeconomic environment and the stretched nature of the equity market, we were cautious with regards to our positioning in case we saw any signs of a potential snapback.
Equity markets finished the month stronger than they came in, despite our concerns. Increasingly this has been due to technical factors and momentum on a small number of very fashionable stocks. The disparity between the US and European equity market performance has been stark – especially when looking at the NASDAQ, due to the incredibly strong performance of Amazon, Apple among others.
Fixed income issuance was elevated in August with companies using positive investor sentiment, yield hunting and very low rates leading companies to issue nearly three times as much corporate paper compared to July. European issuance remains incredibly tight given redemptions and central bank purchasing which keeps the market somewhat in check.
The economic story is struggling to keep up – there is the expectation that governments will continue to step in to help both businesses and the labour market while the threat of a second lockdown looms. It is evident that it will be many months before any version of normality returns – and even that is likely to be the ‘new normal’ which will see many business filing for administration.
We have changed very little in our portfolios, remaining underweight risk, predominantly allocated via single stocks, and reluctant to add further exposure given the underlying macro environment. In fixed income we rotated one issue within the same issuer but to a different part of the capital structure.
I believe that before the end of the year, we will be presented with far better opportunities to buy into equities. The combination of the US Presidential election, Brexit, ongoing Covid-19 issues and a market that appears very rich means that any disappointment will put downward pressure on stocks.
Given where interest rates and yields are currently, portfolios are required to take on higher levels of pre-Covid-19 risk in an attempt to generate the same levels of return. Alternatively, the current financial markets are more likely to reward an investment manager that is both nimble and decisive with their strategy.
2020 has been a rollercoaster year and I believe that there will be further dips for us as investment managers to take advantage of. Having successfully navigated through March 2020, the subsequent rebound that followed and seeing the performance of some of our single stocks over the last six months, at some point the question is raised – when should we take profits?
While it is too soon to be entirely focused on 2021, our strategy revolves around the expectation that there are going to be some winners and a lot of losers given the impact of the virus on our daily way of life. This is the rationale behind our ongoing higher allocation to single stocks versus core index trackers.