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Charles Stanley investment strategy update

Charles Stanley’s Investment Strategy Committee met this week – here are its conclusions.

Charles Stanley’s Investment Strategy Committee met this week – here are its conclusions.

by
Charles Stanley

in Features Fiduciary news

21.08.2020

The Charles Stanley Investment Strategy Committee (ISC) met against the background of new highs for Nasdaq, with Apple becoming the first US company to achieve a $2 trillion market capitalisation.

Equity markets generally have rallied well from the March lows, and many investors are looking forward to general economic recovery. The policy of ultra-low rates and aggressive buying of government bonds by central banks has been driving savers to take more risks with their money in order to get more income and potential return.

The Committee asked how sustainable this rush to risky assets will prove. The ISC confirmed its three scenarios based on the development of the pandemic and policies to contain and stop the virus.

The base case remains an elongated recovery, with advanced countries not restoring 2019 levels of output and income before 2022. Whilst, as expected the first bounce back from the shutdowns, has shown strong figures, it does not look likely that the advanced countries can enjoy a V-shaped recovery restoring all lost output before the end of this year. Substantial sectors of the economy remain damaged by social distancing and changed patterns of demand, with especially difficult circumstances for airlines, hotels, travel businesses, live entertainment and hospitality. A best-case scenario with faster recovery would require early adoption of a world vaccine or more progress with treatments and with eliminating the virus from large areas of the world.

More action from central banks

The Committee anticipates continuing easy money policies by the main central banks, with the European Central Bank and Bank of England likely to extend programmes of quantitative easing when current limits are reached. The US Fed has agreed to do whatever it takes, though it looks currently as if it is wanting the politicians to offer more by way of fiscal stimulus and has been slowing its market actions. More fiscal action is likely from several leading economies, with the US currently debating another package and China likely to expand its stimulus incrementally.

The US actions have ended the dollar shortage that gripped markets in March – and made it easier for the Asian emerging economies in particular to resume some growth. In recognition of the improving trends in that continent, the Committee raised emerging Asia from negative to neutral and noted the good background for the growth sectors there.

The Committee examined the recent strength of sterling and other currencies against the dollar. The Fed’s wish to provide plenty of dollars worldwide has added to a generally weaker outlook for the dollar-based on the loss of much of its historic yield advantage now the Fed has cut rates. The Committee thinks industrial commodities will continue to draw some strength from the China-led revival in Asia and from resumed better output levels in areas like housebuilding in the advanced countries.

The Committee continues to prefer sovereign bonds to risky company paper expecting quite a high level of defaults in the High Yield market, and more downgrades of investment graded company paper given the shortfalls in cashflow and balance sheet stress generated by the pandemic. Inflation-linked bonds remain a good diversification in a portfolio, given the possibility that in due course some of the large growth in money from Central Bank action finds its way into driving up the prices of some goods and services as well as asset prices. It is possible capacity in some areas has been damaged which may lead to more pricing power for some companies in due course as demand increases.

White House race

The Committee saw the main event risk coming from the November US Presidential election. The Democrat candidate Joe Biden is consistently ahead in the polls by an average of around 8%. He also leads in a majority of the crucial swing states needed to win the Electoral College vote that determines the outcome. It is, therefore, Biden's to lose. However, Mr Trump was regularly behind in the national polls in 2016, is still ahead on the issue of the economy, and is not yet out of the race.

A Biden Presidency would mean some big shifts in sector fortunes with a strong emphasis on a Green revolution hitting the oil, gas, coal and transport sectors that have benefitted from the President's policy of self-sufficiency in fossil fuel energy and support for traditional vehicles and heating systems. The renewables and green products areas would-be beneficiaries. Mr Biden also wishes to raise taxes on rich individuals and companies substantially, which would affect the future value of company profits and savings income.

The Democrats would continue the policy of being tough on China but would wish to use international Treaties and bodies more than Mr Trump. They would follow a more traditional international agenda and seek better relations with allies. The election uncertainties made the Committee a bit more nervous about US extended share valuations, but not sufficiently to warrant a downgrade yet. All the time fiscal and monetary policy is this accommodating we should expect high share valuations on the back of very expensive bonds and ultra-low interest rates. 

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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