Investment Environment March 2021

20.04.21

COVID-19 vaccination progress

The number of vaccines administered worldwide has accelerated since the end of February.  86 mil doses were administered at the end of January, 241 mil at the end of February and 574 mil at the end of March as shown in the graph below.  Significant progress has been made but there remains a long way to go given the approx. 8 billion people in the world.

Israel continues to lead the vaccination rate with 104.5% at mid-March.  The UK (38.2%), China (37.4%) and US (33.4%) have made significant progress.  The EU , however, is lagging at only 11.6% as they continue to reach consensus on which vaccination to use given the various efficacy data presented to date.

On balance the roll out of the vaccine and administering process is progressing well and it provides support for a “risk on” environment.

Fiscal stimulus, interest rates and risk free rate

Last month we spoke about the upwards movement in the US Treasury curve from 3 years out and the effect it is having on valuation of financial assets.  This has continued in March as shown in the graph.

Biden has managed to get his $1.9 trillion stimulus package passed by both the House and Senate.  Whilst this is good news for the US economy, due to stimulus cheques landing in the hands of US citizens, who are likely to spend a good portion of it, it should weigh on the US dollar as this is tantamount to “printing money” by the US Federal Reserve. 

Equities

Indices performance (rolling five year returns in USD):

With the exception of Technology, Emerging Markets and FTSE, all other indices were positive for the month of March.  Technology suffered as a result of the steepening of the US treasury curve mentioned above.  Emerging markets and the UK suffered as the US gained back some of its losses YTD.  The 1Y performance shows the sharp rebound of equities since the lows of the COVID 19 sell off in March 2020.  The S&P500 remains the best performing index over a 1,3 and 5 year period with technology and healthcare being the largest drivers of out performance.

Earnings & Valuations

S&P500

Qtr1 2021 earnings season will start to emerge over the coming weeks.  The graph illustrates a sharp rebound in Qtr1 21 earnings relative to Qtr1 20 – 23.3% in total.

It is worth noting a couple points:  1) the growth is fairly broad based 2) the growth revisions (i.e. from 31 Dec 20 to 26 Mar 21) have been significantly upgraded as shown by the two bar graphs per sector.  This is good news as analysts are starting to see the rebound in the economy taking shape 3) Consumer discretionary is going to be a big beneficiary of the additional stimulus as consumers receive their cheques and decide on whether to spend or save.  Financials are also expected to recover as most of the provisioning for non-performing loans took place in Qtr1 20.

Full year 2021: Earnings are expected to increase by 25.4% and the earnings growth is broad based.  Some of the cyclical sectors will show stronger growth but this is off a low base.  Earnings upgrades are also evident which is a sign of better visibility as the world returns to some sort of normality.

From a valuation perspective, the S&P500 is trading at 21.6 times 1YF earnings which is above its 5 year average (17.8x) and 10 year average (15.9x).  Whilst this seems high today, earnings revisions and upgrades continue to surprise on the upside as the rebound in the global economy starts to take shape.  If the actual earnings are better than forecasted, this will go a long way to narrowing the valuation gap that currently exists.

Portfolio positioning

Generally we continue to maintain equity exposure in the 40% - 60% range with the majority invested in the S&P500, Information technology and Healthcare sectors.  In some cases we have added some cyclical exposure to the Materials sector given the outlook for commodities.  Also, depending on the client’s mandate, in some cases there is exposure to Emerging Markets, Europe and UK to make up the overall equity allocation.  All three of these geographies have benefitted more recently from a weakening USD and a re-rating.

Exposure to bonds has worked well for the time being given the downward move in the US Treasury Yield Curve with maturities less than 7 years.

Listed property has recovered from an asset class perspective as the US economy makes significant strides in the vaccination role out.  The hope that “normality” may be around the corner is not necessarily a pipe dream!

Physical gold and platinum have been added to the portfolio in some cases.  The reason for investment in  Platinum is two-fold: 1) platinum is currently trading in a supply deficit which is supportive of the price as demand, particularly out of China (autos and jewelry) continues to prevail; the breakeven all in cash cost for platinum is approx. $860 an ounce which provides some downside  protection in our view 2) it provide hedge against a weakening USD as the opportunity cost to hold physical metal is zero with no interest rates.  Gold was added to provide diversification benefits to the portfolio.  The price of Gold has decreased since being added to the portfolio driven by a “risk on” environment but we believe Gold has been oversold in the short term.  In addition, investors have switched their physical gold exposure to Bitcoin as a store of value.  We remain skeptical of gold being replaced by “liquid gold” or cyber currency as a store of value.  Should there be a major correction in the price of Bitcoin, Gold will likely be the beneficiary thereof.  In many of the portfolios we have achieved an exposure to both platinum and gold by a holding Sibanye Stillwater.  Sibanye Stillwater is a well run business and a beneficiary of higher PGM and Gold commodity prices and the share price remains at reasonable value.

Another area of interest for the medium to longer term is the clean energy sector and we have added or are looking to add a Clean Energy ETF and a Lithium ETF.  The cost of renewable energy has decreased significantly over the years making it very competitive with traditional sources of energy.  We also believe that Biden will promote climate change, has advocated rejoining the Paris accord and implement policies to fast track the adoption of renewable energy which should benefit the companies included in this ETF.  Lithium is a key commodity used in the manufacture of batteries.  The price of lithium is largely determined by China.  We have seen an uptick in both the price of lithium as well as the demand to support the growth in electric vehicle adoption.  This ETF should benefit across the whole value chain from mining, refining and manufacture.  Since adding these two ETF’s they have suffered a pullback in valuations which we believe is short term in nature.  An interesting article from HSBC, which is attached, provides some insight into the pull back in valuation.

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