Stock market and economic commentary February 2021

“Tomorrow will be a Good Day” Captain Sir Tom Moore.

Every crisis brings forward a hero and many have been born out of the coronavirus pandemic. Scientists, healthcare professionals, teachers and ordinary people on the ‘frontline’ of the pandemic. All helping directly to battle the virus and indirectly to keep as many of us in work and education as possible.

Captain Sir Tom Moore appeared from nowhere at exactly the right time when our spirits were low. He summed up everything that was good about Britain in the fight against Covid-19 and the boredom of lockdown. His indomitable spirit and friendly grin were the image of ourselves that we would like to see projected back from the mirror. A picture of our national character, refusing to be beaten and thinking only of others first.

In the hour of need, every nation needs a Captain Tom and others like him who may not have received the same recognition. We salute and thank them ALL; each and everyone.

And as we say goodbye to Captain Tom and to many thousands of others, we can see that tomorrow will indeed be a good day, as glimmers of light gradually appear at the end of a long dark tunnel.

We celebrate the incredible, innovative response from the global scientific and healthcare community and slowly but surely, we are winning the battle against this unseen enemy and its invisible mutations. The availability of multiple, effective vaccines is clearly good news for global society, for global economies and for the diversified companies in which the Clarion Portfolio Funds invest.

As bad as the virus news appears, with global deaths rates currently double their April peak, we could look back and see this as the turning point. The vaccine roll-out is gathering pace. Alongside those who have gained natural immunity from infection, new cases and especially hospitalisations could fall away quickly in the spring, allowing economies to re-open gradually at first and then more thoroughly later in the year. We saw last year the speed of recovery post-lockdown. If this round of re-opening is accompanied by increasing belief that the pandemic is set to fade, we could see the type of growth not witnessed in a generation.

The ingredients for spectacular growth are most visible in the US. The policy support has been tremendous, more than covering lost household disposable income and with additional stimulus still to come.

A further $1 trillion in front-loaded pandemic relief will be made available and, later in the year, another net $1 trillion in recovery spending. The latter will impact the economy more in 2022 and beyond. While politics could lead to another impasse, there is also a decent chance that a compromise involves even more spending and less revenue raising than currently expected.

This comes at a time when US household balance sheets have rarely been better. Savings are very high relative to wealth and much of this is in the form of liquid assets ready to be spent. At the same time, households have completely deleveraged from the accumulation of debt which caused the 2008/09 financial crisis, while mortgage rates have more than halved over this period. There could be huge pent-up demand as confidence returns and people make up for lost time as the economy reopens.

Stock markets are looking through the current wave of lockdown restrictions and anticipating a return to normality over coming months thanks to the availability of the vaccines. As restrictions ease, it is almost a mathematical certainty that economic activity will show a decent year-on-year recovery in 2021, and the stimulus efforts of recent months will support this rebound. Much of life will then return to normal, although the pandemic will have left both a long shadow on the global economy and an indelible mark on our habits.

In terms of corporate themes, several have emerged and/or accelerated as a result of the crisis and these will continue. The acceleration of digitalisation; a much higher level of flexible and remote working; a greater appreciation of the importance of social responsibility and multi-stakeholder capitalism; more awareness of the risks posed from externalities (including most obviously climate change); a desire for supply chain, operational and financial resilience and a greater emphasis on hygiene and healthcare. These themes present risks to companies and require adaptation, but they also provide interesting avenues for growth over coming years.

“We’re not going back to the same economy. We are recovering, but to a different economy”. Jerome Powell, Chair of the US Federal Reserve.

The seeds of successive market cycles always grow from the ashes of the last and it takes time to see what flourishes. The next three to five years are going to be like no other post-recession in history, due to the unusual starting point. Stock markets tend to take years not months to recover from shocks such as those in 2020. Yet in this cycle, many of the world’s largest technology companies benefited from the crisis, buoying markets due to their weight in the indices which is the highest and most concentrated in history.

As we emerge from lockdowns and other government interventions, many of these companies will slow and the current engine of stock market growth will splutter. Some businesses will not survive, many will end up stronger. The struggle between these various parts of the market will define its overall performance, judged by earnings power.

The other variable which determines market valuations is of course interest rates. The lower they stay, and the more money governments print, the more attractive cash generating assets like stocks and shares become. It seems clear that interest rates will stay low for as long as possible, but inflation is beginning to raise its ugly head again with price increases in oil and other commodities. Backward looking data on prices paid in the industrial sectors, combined with a dovish message from the Fed is now receiving support from the oil price. Oil has been and will remain, an all-important driver of inflation over the medium term and the portfolio funds are constructed to withstand what issues that may bring but we need to tread carefully.

The beginning of the month also coincided with a great deal of interest in and around the investing world, triggered by the “Reddit traders” making, in some cases, staggering profits (and losses) at the expense of seasoned market participants. Indeed, instead of reading this commentary you could be listening to the rapper Ja Rule giving his thoughts on GameStop on CNBC or reading “wall street bets’ musings on Reddit.

Our recent commentaries will be far less exciting, by design. Instead of buying companies whose names are trending on Twitter, our fund managers seek those that can consistently generate high levels of cash earnings, which can then be reinvested in growing the business at attractive rates of return. In more mature industries, where opportunities for reinvestment are more limited, they focus on growing businesses with high levels of cash return, through dividends and buybacks.

The recent frenzy in certain areas of the market creates many opportunities in other, less popular, areas where more exciting long-term prospects can be expected. The tug of war between hedge funds and online investor groups creates a good story but will have little impact on the outcome for long-term investors. Stock markets have demonstrated the ability to eventually determine the fair price for stocks even if short term movements become more volatile.

“Although it is easy to forget sometimes, a share is not a lottery ticket. It is part ownership of a business.” Peter Lynch; Renowned American Investor.

In the early 20th century, it was anecdotes of the shoeshine boy or the bellhop offering stock tips that purportedly flagged it was time to sell. Will investors be looking back on February 2021 as a sign that exuberant market activity was indicating things were looking somewhat fragile? Perhaps, but as headlines are dominated by companies whose market valuations bear no resemblance to their intrinsic value, we are content that the current value of the Clarion portfolios is far from stretched.

While recent market activity has been an entertaining distraction to see investors through the dark days of February in lockdown, our fund managers continue to focus on high quality, resilient and financially strong companies. This approach can appear overly careful during market phases such as this recent one but episodes such as this have come and gone many times over the years and will come and go again. It is worth stressing that our long-term investment approach is not changed by them. We continue to view shares as fractional stakes in real companies and as we look ahead to the rest of 2021 and beyond, we feel positive about the quality, resilience, and valuation appeal of the underlying holdings in the Clarion Portfolio Funds.

February was also notable for the anniversary of another significant event which took place 50 years ago; D Day, Decimalisation. On February 15^th, 1971 Britain’s currency had changed over-night for good. The days of the shilling, half crown and three-penny bit had gone for ever. Britain was in the midst of a seven-week postal strike, the average person spent £2.31 on food and the average price of a house was £4,265. Base interest rates were 7%. £1,000 invested in the average savings account would be worth just over £12,000 today but only £781, taking into account inflation. A net fall in purchasing power of over 20%.

By comparison £1,000 in a basket of stocks & shares would be worth more than a quarter million pounds, around £16,000 after inflation, 20 times greater than the average savings account. If ever there was an argument for having a sound financial planning strategy and taking good investment advice, this is it.

As always, we wish all our clients, their families, and friends the very best of health and good fortune for the remainder of 2021 and a gradual return to something resembling normality. In accordance with government guidelines our office is closed but we are available for contact via the office number, email address and all normal forms of communication. We look forward to updating you regularly over coming months and as always please do get in touch if you have any questions.

Keith W Thompson

Clarion Group Chairman

February 2021

Creating better lives now and in the future for our clients, their families and those who are important to them.

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.