Let’s Get Cyclical, Cyclical

John Leiper – Chief Investment Officer – 18th September 2020

14th September 2020
Read Full Article P.17

The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.

UK equities are deeply unloved, suffering as they do from a confluence of factors including a weak domestic economy, poor handling of the coronavirus and ongoing anxiety over Brexit. This is reflected in the relative underperformance of UK equities versus developed market peers.

With a looming October deadline, the next catalyst is Brexit and whilst near-term negotiations are likely to get worse before they get better, we continue to believe a deal will eventually be reached. If that is your base case, there is clear upside to UK equities although investors will need cast iron conviction and a strong stomach to navigate the interim volatility.

The rebound in global equities, outside the UK, has been led by the US but market breadth is thin and most of the gains have been driven by a narrow group of global technology companies whose business model is particularly suited to the coronavirus. Instead, UK equities are largely geared to value and cyclical stocks with energy, financials, industrials and materials accounting for approximately half of the FTSE 350. These sectors have fallen out of favour for a variety of reasons including dividend cuts, falling energy prices and a broader structural shift towards ‘ESG’. They also do best in a reflationary world when interest rates are rising.

Higher rates are a distant prospect, but the Fed’s announcement that it was shifting to average-inflation-targeting, felt like a key moment. As a result, Powell’s speech could be seen as the klaxon for a new phase in the global macroeconomic cycle. If this coincides with an improving economic outlook, then we could see a significant rotation within equity markets towards value/cyclical sectors, which could work to the benefit of laggards like the UK.

The return of inflation should benefit real assets such as commodities, which I see as a UK play. Commodities have performed very well recently as demonstrated by iron ore prices which allowed Rio Tinto to return $2.5 billion to shareholders, making it one of the UK’s biggest dividend payers. Whilst this is an extreme example, investors are likely too pessimistic on forecast dividend cuts, as we saw in swap markets following the subprime mortgage crisis in 2008.

Currency is another factor. The FTSE 100 is dominated by multinational companies which derive the majority of their revenue overseas, meaning when the pound is strong it acts as a headwind to profits. Setting aside near-term volatility, we think the US dollar can depreciate as much as 20% over the coming years. If sustained, a strong pound is bad news for UK equities and the economy, as it tries to establish an independent future outside the EU.

To summarise, UK equities are attractively valued and should benefit from a deal on Brexit, a rebound from overly pessimistic dividend expectations and a rotation toward cyclical/value based sectors following a noticeable improvement in the economic outlook. However, considerable uncertainty remains and at this juncture the risk to reward ratio is simply better elsewhere.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.  

Want to know more about the Equity Markets?

Please contact us here:

6 + 5 =

Recent blogs
RECESSION, INFLATION AND RISING INTEREST RATES

RECESSION, INFLATION AND RISING INTEREST RATES

With the Bank of England announcing the biggest interest rate hike in 27 years and forecasting that Britain will enter a year-long recession with inflation topping 13%, you could be forgiven for feeling a little gloomy about things. Granted, the picture that was painted at the last Monetary Policy Committee (MPC) meeting isn’t a pretty one.

read more
ROTATIONS & DIVIDENDS

ROTATIONS & DIVIDENDS

Back in November 2020 I wrote a blog, Nothing Is More Powerful Than An Idea Whose Time Has Come, in which I made the case for a Great Rotation across equity markets where the prior winners, growth stocks, would give way to value stocks which would outperform going forward.

read more
What we learn from history…

What we learn from history…

Market crashes and economic downturns are a part of life. Market calamity can occur seemingly out of nowhere and whether it be a dotcom bubble, a financial crisis, Brexit or Covid-19, we can never predict the full impact of a new market crash. We can however forecast that its effect on the markets, and the wider economy, will ultimately be temporary.

read more
MARKET THOUGHTS

MARKET THOUGHTS

In late February, following the invasion of Ukraine and subsequent market sell off, I wrote a blog (Commentary & Positioning) outlining Tavistock Asset Management’s thoughts. Three months on, financial markets have continued to come under pressure and have weakened further.

read more
RUSSIA TRADE

RUSSIA TRADE

I want to begin this blog by firstly taking time to explain why foreign exchange is an important part of portfolio composition and why as investors you should be paying close attention to currency exposure, as it could be driving or eroding your investment returns.

read more
TIP OF THE ICEBERG

TIP OF THE ICEBERG

I want to begin this blog by firstly taking time to explain why foreign exchange is an important part of portfolio composition and why as investors you should be paying close attention to currency exposure, as it could be driving or eroding your investment returns.

read more
The Commodity Carve-Out

The Commodity Carve-Out

Global markets in 2022 have exhibited abnormal volatility. Inflation readings sit at multiples of central bank targets around the world, and a plethora of rate hiking cycles have begun in attempts to combat this. Muted capital expenditure during the pandemic has left supply chains in tatters, and producers scrambling to secure inputs. When compounded by an invasion involving two hegemonic commodity producers and a pilgrimage towards net-zero carbon emissions, we at Titan believed an environment for sustained commodity outperformance was firmly in place.

read more
Importance of Foreign Exchange

Importance of Foreign Exchange

I want to begin this blog by firstly taking time to explain why foreign exchange is an important part of portfolio composition and why as investors you should be paying close attention to currency exposure, as it could be driving or eroding your investment returns.

read more
COP26 Revisited

COP26 Revisited

COP26 RevisitedWritten by James Peel - ESG Portfolio Manager - Titan Asset ManagementCOP stands for ‘Conference of the Parties’ and is the decision-making body of the United Nations Framework...

read more

Bubbles and Dividends

Bubbles and DividendsWritten by Steve McGregorAs I wrote in late January, it has been a volatile start to 2022. For the last couple of years, markets have enjoyed central banks pumping lots of money...

read more
Quarterly Perspectives 2021 Q4

Quarterly Perspectives 2021 Q4

Tavistock Asset Management Investment OutlookQuarter 4 2021 Written by Titan Asset Management Investment TeamQ4-2021 QUARTERLY PERSPECTIVESWelcome to the Q4-2021 ‘Quarterly Perspectives’...

read more
Rise of the Underdog

Rise of the Underdog

In its latest economic outlook, the OECD increased its expectations for global GDP. For 2020, the improvement is minimal, reflecting an upward revision, in real GDP, from -4.5% to -4.2%. But beyond that, growing economic momentum should boost global growth to pre-pandemic levels, estimated at 4.2% in 2021 and 3.7% in 2022.

read more
Anatomy of an Election (So far…)

Anatomy of an Election (So far…)

The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly.

read more
Since the Market Low

Since the Market Low

The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.

read more
The Call-Up

The Call-Up

Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.

read more
Technical Perspectives

Technical Perspectives

In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.

read more
A Speech For The History Books

A Speech For The History Books

In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’. This means the Fed will now allow inflation to overshoot its official 2% target to compensate for prior years where inflation failed to reach that level.

read more
Room to Run

Room to Run

Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.

read more
Rising Phoenix

Rising Phoenix

In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.

read more
All That Glitters…

All That Glitters…

In last week’s blog, This Time It’s Different (24 July 2020), I suggested the US dollar was on the cusp of crashing through its decade-long uptrend.

read more
The Return of Inflation

The Return of Inflation

Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress.

read more
The Powell Pivot 2.0

The Powell Pivot 2.0

In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.

read more
Don’t Fight The Fed

Don’t Fight The Fed

Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy.

read more
Super Contango

Super Contango

In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63.

read more
The beginning of the end?

The beginning of the end?

The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt.

read more
TAM IFA Hub