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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

10.07.2020

The Charles Stanley Investment Strategy Committee (ISC) met on 9 July to review economies and markets. It noted the large gap between the performance of markets, which have been rising strongly for the last three months, and the present and future performance of the economies and companies struggling with the impact of the pandemic and the policies to try to control the virus.

The Committee reviewed the extent of the fiscal and monetary stimulus being released by all the main central banks and governments, which provides the explanation behind recent bond and share market performance. It seems likely the central banks will slow their rate of purchases of bonds, as they have been doing recently, but not to the point where they trigger a new collapse in prices.

Both the US and Japan have made clear they will buy whatever it takes to keep  bond markets at high levels, whilst the European Central Bank and the Bank of England have both announced substantial new totals of quantitative easing money, which they can spend as need arises. The Committee thinks this should underpin markets for the time being, despite the poor economic news.

The Committee discussed the pace and shape of the recovery. It decided that the base case remains one of a fast rebound from lockdown to a level considerably below January 2020, followed by a slower pace of recovery. It could be the Spring of 2022 before GDP and income return to early 2020 levels in the advanced countries. Worse cases would include a second bad wave of the virus leading to further economic disruption, and the possibility that the rate of insolvencies and refinancings necessitated by the closures undermines confidence further and delays recovery more.

Ratings changes

The Committee decided to downgrade property from “neutral” to “negative” given the big downward pressures on retail rents and capital values, and the possibility of some weakness for office properties as companies reappraise their needs and the working  patterns of their staff.

Real-estate investment trusts (REIT) prices have rallied a bit in the last three months, whilst valuations of some underlying property has not adjusted that much yet, given the shortage of transactions.

Infrastructure was upgraded to “positive” from “neutral”, requiring care when selecting to reflect the growing areas that will come from the enthusiasm for green growth and the need for more digital network capacity.

The Committee moved global index linked bonds to “positive” from “neutral” as a hedge or diversification against the possibility that high levels of money growth and bond buying lead to some  more general inflation, especially in  the US where this money trend  is most pronounced.

The Committee confirmed its “neutral” overall weightings recommended for both bonds and shares, and its preference for government bonds over corporate bonds given the balance sheet risks at a time of damaged cashflows for many businesses.

It noted the strong out performance of Nasdaq and technology within the world equity market which has made valuations more challenging, but thinks this trend can be sustained a bit longer while the authorities underpin markets with so much money.

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