An outlook on equities and bonds – Op Ed

Rupert Thompson

The equities market has begun to show significant volatility recently, due to unusual announcements. Rupert Thomson of London-based asset manager Kingswood takes a detailed look

Greek shares trade

By Rupert Thompson, Chief Investment Officer at Kingswood, a London-based AIM-listed international wealth management group, with around 16,000 active clients and circa £4.8 billion of Assets under Advice and Management.

The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.

The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine being heralded by media to be up to 90% effective in preventing Covid infections.

This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.

Of course, these vaccines will do little to halt the current surge in supposed infections. Cases are now being reported to be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.

Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.

Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.

Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.

Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.

We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.

We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.

We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.

On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

 

Read this next

Inside View

Broadridge report finds 27% of firms’ overall IT budget goes to digital transformation

“A new chapter in digital transformation is emerging. In our work with clients across the financial services industry we see leading firms are already reaping the benefits from digitalization and the use of technologies such as AI and blockchain/DLT, as they adapt to economic headwinds and new competitive dynamics”

Executive Moves

Ripple announces Monica Long as President

“I’m incredibly honored to take on the role of President at Ripple as we expand deeper into crypto-enabled services like liquidity, settlement and custody.”

Executive Moves

Arabesque AI appoints Carolina Minio Paluello as CEO

“Arabesque AI is uniquely positioned to service the asset management industry’s need to meet the growing market demand for hyper customised portfolios.”

Industry News

SEC Commissioner Mark T. Uyeda says standardized ESG measures are doomed to fail

“Because ESG ratings may be divorced from matters of financial materiality, they can reflect a particular political or social agenda.”

Industry News

Worldline launches digital payments suite in India

“Our low-cost innovative offering SoftPOS will empower SMBs in a big way to accept digital payments affordably.”

Technology

cTrader Web 4.5 Presents Guest Mode, Multiple Charting and Copy Improvements

Spotware has announced the release of its cTrader Web version 4.5, which comes with a whole range of features and improvements for all cTrader users.

Technology

SteelEye suggests integrated surveillance as Morgan Stanley fines employees over WhatsApp

“The use of integrated surveillance means firms can avoid unwanted regulatory attention by enabling them to self-report and self-remedy more efficiently when malpractice is flagged.”

Industry News

ASIC bans Gregory William Finerty for unlicensed FX algo trading bot

Bradford AI leased an algorithmic trading program known as ‘Robot 1’ to trade on the FX market, using an Australia-based over the counter contracts for difference (CFD) broker.

Opinion

With the recent changes to St Vincent licensing, what will the future trends be for licensing in 2023?

New St. Vincent and the Grenadines regulations came as somewhat of a shock for those brokerages that are only regulated in SVG

<