Shadow falls over value rebound; Running the rule over DFMs' favourite investment trusts
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A rally too far?
As we discussed yesterday, analysts aren’t yet too worried about rising government bond yields’ impact on equities. And while that doesn’t mean there aren’t stock market winners and losers, identifying those stocks isn't always straightforward.
To start with the uncomplicated stuff: it’s news to no-one that bond proxies are among those most at risk from rising bond yields. Similarly, in an environment where investors are looking ahead to the prospect of economic recovery and even higher inflation, certain cyclical plays like commodities stand out as obvious winners.
But it’s a little harder to map allocators’ other equity market debates onto the current dynamic. SocGen, for one, has cautioned against seeing higher bond yields as being automatically beneficial for value shares. While growthier stocks have de-rated in line with the bond sell-off in recent weeks, that hasn’t translated into an equivalent bounce for value. According to SocGen, that’s because of the rally they’ve already enjoyed since November. The bank says:
Many recovery names are no longer cheap, or their earnings are still depressed. So while the low price to book factor is doing well, stocks with high PEs are also doing well, which is why the value factor is not performing quite as strongly as you might expect,
On a relative basis, of course, value has clearly continued to do well enough compared with growth in recent weeks. But as the above comment indicates, those gains have been superseded by other parts of the market. Allocators favouring cyclical or small-cap plays have been more richly rewarded of late.
Maintaining trust
Investment trusts were another victim of the recent dip in equity markets – the FTSE Equity Investment Instruments Index dropped 5.2 per cent last week. That compared with a drop of 1.6 per cent for the All-Share, and represented its worst week since last March.
It wasn’t just equities that were hit hard: trusts like NB Distressed Debt and Amedeo Air Four Plus both saw share prices fall by double digit amounts, according to Winterflood.
Discounts on the more popular trusts quickly narrowed again at the start of this week. The appetite for bargains, particularly among retail investors buying equity trusts, remains as keen as ever. But as all DFMs will acknowledge, it’s another asset class that interests professional trust buyers most nowadays:
The chart above shows the most popular trusts in our DFM fund selection database, as of the turn of the year. One theme stands out: infrastructure investing is a common strength for many of these strategies. Commercial property is another, with Supermarket Income Reit having risen rapidly up the ranks as a result of the pandemic.
Outside of these areas, there’s room for just one other strategy: Hipgnosis Songs still splits opinion in the investment world, but it has its fair share of advocates in wealth management.
There are a couple of equity vehicles lurking just outside the top 10: Scottish Mortgage and JPM EM Income. Otherwise, the list continues in much the same fashion, with the likes of BBGI and Tritax Big Box still retaining a decent amount of interest from discretionary buyers. Real assets remain the order of the day for those interested in closed-ended offerings.
Gold run
Gold’s status as an inflation hedge has taken another hit: the price of the precious metal has hit an eight-month low on expectations. The rationale makes sense: rising interest rates worsen the relative attraction of a zero-yielding metal, and an economic recovery lessens the need for safe havens.
We’ve spoken in the past about gold’s ability to be all things to all people – but this could easily be reversed if inflation were to begin a slow climb higher rather than spiking materially. Absent a real inflationary shock, and with deflationary pressures receding, bullion could find itself caught between two poles.
