The market factors to watch

Columbia Threadneedle Investments and Jupiter Asset Management share their thoughts on the market drivers to watch.

In the highly uncertain world of Covid-19, investment and economic news is prolific and fast changing – adding to the angst of clients watching volatile markets and fluctuating investment values. We ask investment managers from Columbia Threadneedle Investments and Jupiter Asset Management for their perspectives on what’s happening to markets and which factors to pay most attention to.

What’s been some of the most important economic and market news for you?

Simon Bond, Director of Responsible Investment Portfolio Management, at Columbia Threadneedle Investments: The decline in economic conditions warrants attention and illustrates the sheer magnitude of economic difficulty western nations face. Specifically, the weekly initial jobless claims number at the end of March showed around seven million people had lost their jobs*. It’s an astonishing number and without historical precedent.

For markets, the decline in the rate of growth of new Covid-19 cases and fatalities in developed economies has been supportive – and suggests the extraordinary measures taken to ‘close’ economies are working.

*Source: US Department of Labour as at 31 March 2020.

Alastair Irvine, Product Specialist, Jupiter Independent Funds Team: Rather than pinpointing individual factors, it’s important to remember that economic and market news items are invariably linked. The more optimistic prospect of the gradual relaxation of lockdowns across Europe and the US, and partial recovery in commodity prices have, to some extent, offset declining dividends and data which reports past rapid economic deterioration.

However, for me, most significant was the US Federal Reserve (the Fed) announcing unlimited quantitative easing (QE), and extending its bond purchasing beyond US Treasuries – followed by Chairman Jerome Powell recently saying the Fed is not yet out of ammunition. The Fed was instrumental in restoring orderliness to markets previously confronting impending meltdown.

Which factors do you believe will have the biggest impact on markets and investments over the coming months?

Simon Bond, Director of Responsible Investment Portfolio Management, at Columbia Threadneedle Investments: Primarily, the speed at which the Covid-19 virus case count is reduced globally and how governments respond to this.

Ariel Bezalel, Fund Manager, Jupiter Asset Management: Markets will be focusing on the shape of the recovery and whether authorities have done enough in terms of policy easing.

In the US, we’ve seen a sharp rise in unemployment and the question is how many of those jobs have been permanently lost? Also in the US, where the consumer accounts for as much as 70% of gross domestic product (GDP), to what extent has the consumer psyche been scarred by recent events? Typically, following such an event you would expect to see precautionary savings jump markedly.

Corporate default rates will also have to be monitored. The authorities may have solved liquidity issues, with various government schemes in place, but longer term, have they helped solvency? With many companies operating somewhat below capacity due to social distancing measures, they may not have enough cashflow to service their debts. Bear in mind that over the next two months, many of the generous government schemes to support employees and corporates in the US expire.

Finally, market participants will be monitoring the US dollar – a key market indicator. For risk assets to continue to move higher we need to see the dollar move lower. A weaker dollar is associated with easier financial conditions. A weaker dollar will make it easier for the debtors, especially in emerging markets where a lot of debts are denominated in dollars, to service their debts.

What do you think are the three most important factors for investors to focus on?

Simon Bond, Director of Responsible Investment Portfolio Management, at Columbia Threadneedle Investments: One, market fundamentals (economic conditions and credit fundamentals); two, structural issues (demand for credit and supply of new issues as well as central banks and government buying); and three, valuations (spreads of corporate bonds over government bond yields).

Mark Heslop & Mark Nichols, Fund Managers, Jupiter Asset Management: In such a time of extreme uncertainty and with a likely difficult future economic backdrop, investors should consider businesses that at the very least will survive (manage the downside risk), hopefully improve their market position and, ideally, benefit from the current challenges.

We look for companies that have sustainable pricing power as a consequence of either their product differentiation or their robust customer base. In general, well-managed market leaders are likely to strengthen their market position in times of crisis as weaker competitors struggle to adapt and fall by the wayside. Most businesses will struggle to grow in the years to come, but some secular growth drivers will accelerate. We believe that identifying these opportunities and backing the winners will help to deliver good returns.

How are your portfolios positioned in the current environment?

Simon Bond, Director of Responsible Investment Portfolio Management, at Columbia Threadneedle Investments: We are more optimistic about spread markets than at the start of the year. While the temporary downturn in the economy is severe and credit fundamentals (the ability of companies to repay their obligations) are deteriorating, the policy response from central banks and governments has impressed in its scale, scope, speed and coordination. Combined with more attractive valuations, this makes us more positive about risk markets.

From a social perspective, we’re supporting the global Covid-19 response by investing in social and sustainability bonds ($48 billion issued so far). These are issued from development banks and corporates focused on alleviating Covid-19 from health and jobs perspectives.

Mark Heslop & Mark Nichols, Fund Managers, Jupiter Asset Management: Our approach to investing focuses on long-term ownership of the highest quality European business franchises with strong economic moats, sustainable competitive advantages and exposures to a diverse selection of long-term secular (not cyclical) growth opportunities. Although listed in Europe, our companies tend to be global champions in their industries, be cash generative (strong balance sheets) and have a relatively high degree of recurring revenues.

What would you say to a friend or family member concerned about the value of their investments?

Simon Bond, Director of Responsible Investment Portfolio Management, at Columbia Threadneedle Investments: Markets are often driven by the fear of losing money and greed – missing out on making money. For the long-term investor, we believe that often acting in contrary to the prevailing sentiment may be a good idea. Think of the performance of credit markets in the period after the global financial crisis as an example.

Alastair Irvine, Product Specialist, Jupiter Independent Funds Team: Market crashes are always painful, but don’t panic – adversity presents some opportunities. Much depends on risk appetite; no two individuals’ are identical. But common principles apply: keeping up in rising markets, and trying as far as possible to minimise losses when markets are falling. Capitalise on opportunities while avoiding torpedoes. Market timing is difficult, even for professionals, but a well-managed, diversified spread of investments is a good foundation for any long-term investor.

More views from leading managers

Links to the latest views on the impact of COVID-19 on markets and economies from a range of leading investment management groups.

The Standard Life platforms offer access to a wide range of mutual funds from different fund managers. As part of our topical market updates to advisers, we invite the views of investment experts from these fund managers. This content is not paid for. It’s purely a way to share a range of insights from across the industry.

The views expressed in this article are those of Columbia Threadneedle Investments and Jupiter as at June 2020 – and not Standard Life Aberdeen. Standard Life Aberdeen accepts no responsibility for advice that may be formulated on the basis of this information.

Please remember that the value of your client’s investment can go down as well as up and may be worth less than was paid in.

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