A quick announcement: Asset Allocator will be holding a webinar for wealth managers, asking whether DFMs' ESG allocations are fit for purpose, on December 9.
To find out more and to sign up, click here.
Back to black
November was a record month almost everywhere: the Euro Stoxx 600, Nikkei 225 and Russell 2000 benchmarks all posted their largest-ever monthly gains, the FTSE 100 rose by the most in 30 years, the MSCI World by the most since 1975, and so on.
The bar is set slightly higher for the major US indices nowadays, but the Nasdaq and S&P did at least manage their best months since April. Double-digit gains were evident wherever you looked.
In keeping with that, vaccine excitement has prompted many to dial up their expectations for 2021. Analyst consensus expects earnings per share growth of some 50 per cent in Europe next year, and 22 per cent in the US.
As the FT bluntly noted this weekend, equity analysts “are usually wrong”. But investors have shown an unerring ability to keep moving prices higher in recent times; if the pandemic does end this innate optimism could conceivably reach new heights.
As ever, there will be particular winners from this process, which is why value indices have started to soar again. But even this is a simplistic take: SocGen points out that EM and Japanese value shares actually underperformed other styles in November.
For now, DFMs will be content to note that the majority of their portfolios are back in the black. Early estimates from Arc’s Suggestus portal show that Balanced and Growth private client indices are now in positive territory for pretty much the first time this year. It’s a similar story for Pimfa’s own private investor indices. After a dramatic year, ending 2020 in positive territory would be reward enough for most allocators.
Despite – or because of – the prevailing sense of euphoria, thoughts are continuing to turn to how best to protect portfolios. When doing so, most wealth managers have historically been very conscious that they’re running sterling-based offerings, which typically translates into sterling bond positions. This year, however, has shown signs of change on that front.
Our fund selection database shows the government bond exposures being added by wealth managers to their portfolios this year are more likely to have been treasury rather than gilt funds.
Unsurprisingly, these additions are all trackers or ETFs. Less conventionally, some discretionaries have either introduced or added to these positions even as the traumas of Q1 faded away. The nervousness prompted by the ruptures in the Treasury market has been long forgotten; the important thing now is Fed support – and the sense that the central bank will be pretty happy to look past any nascent inflation rise until the economy is fully back on its feet.
All of which is to say: it’s not just equities where US positions are on the up, and UK exposures are being dialled down. When it comes to bonds, this trend is much more marginal: sterling corporate and/or sterling strategic bond funds remain the bedrock of most allocations.
All the same, in an era when much of the current 60/40 portfolio commentary is from a US perspective, it’s clear such analyses aren’t quite as foreign to DFMs as they once were.
Compare and contrast
A market in which assets are moving quickly often brings unusual barometers to the fore, and the current one’s no different. Bloomberg notes that one such metric is the ratio of copper prices to gold, and its relationship with treasury yields. As you’d expect, the former is surging at the moment, as bullion struggles and copper hits multi-year highs on the back of economic recovery hopes.
The difference, this time, is that bond yields have remained anchored – a point on which we touched yesterday. The conclusion, per Bloomberg, is that the Fed’s cautious messaging is working, and providing plenty of support for bond prices.
The question that lingers here – and which perhaps overshadows all of the above discussions – is what this means when equities go into reverse. Treasuries have again displayed the ability to rally in times of crisis and remain anchored in times of plenty this year. Maintaining those twin strengths is becoming more challenging – but far from impossible.