With continued recovery in many markets we take a look at some key components and the approach we have taken within the portfolios.
US hits new highs
August saw total global equity market capitalisation surpass the highs of February, exceeding $90 trillion. This has been driven by a seemingly unstoppable US equity market, with the S&P 500 now above its February highs and the tech-heavy NASDAQ up over 30% this year. Earnings per share for the S&P 500 has not followed suit however, down 14% since the end of 2019. Hopes of a swift recovery in 2021 seem to be partly driving the enthusiasm as estimated earnings for the index have started to tick up throughout July and August. US valuations from a market cap weighted perspective look expensive to say the least. The ratio of total US market cap to GDP, colloquially known as the ‘Buffet Indicator’, reached new highs in August and is now significantly ahead of the peak reached at
the turn of the century.
Seeking US value by taking a different approach
Whilst market cap weighted indices in the US look expensive, we believe a significant opportunity exists at the individual stock level for a highly active stock picker with a value investing framework. We consider our investment in the Conventum Lyrical Fund as an attractive expression of the analysis we have carried out across the US equity market, with the fund having an active share of 99% versus the S&P 500, coupled with a deep value philosophy practiced by the manager for two decades.
Government support of businesses key to economic recovery
It would be difficult to argue that central banks could have done much more to keep the wheels turning at many corporations. With state-imposed lockdowns bringing normal business activity to an effective standstill, the ability for many businesses to tap the credit markets has been key to survival. Central bank intervention in fixed income markets has pinned corporate bond yields to record lows, allowing companies to raise fresh debt without incurring, at least in the short-term, a potentially unserviceable interest rate cost. During the month, total investment-grade corporate bond issuance in the US exceeded the record full-year total of 2017, with four months to spare.
The effect of central bank policy has also been observed in the gold markets, where physical gold surpassed $2,000 per troy ounce for the first time in history. Besides a weakening US dollar, another key driver to gold has been the fall of real interest rates into negative territory. As an asset, gold does not produce an income and so in normal times, a saver looking to earn a positive real yield, would unlikely view gold as an attractive asset. These however are not normal times. When interest rates, adjusted for inflation, are negative, gold becomes a significantly more attractive asset for savers, thereby increasing demand. Gold related investments stand at over 6% of portfolios, and we continue to view them as important positions in the current market environment.
Recovery at pace
The portfolios continue to recover at pace and although there are of course many moving parts we believe there is much left to return within our selected assets as we continue on the journey to a new normal.
Seneca Investment Managers Limited
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Source for all information: Bloomberg Finance L.P. For professional investors only.
Past performance should not be seen as a guide to future performance. The outlook expressed in this communication represents the views of Tom Delic at the time of preparation and are not necessarily those of Seneca Investment Managers Limited. His views may be subject to change and should not be interpreted as investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This document is provided for the purpose of information only. Seneca Investment Managers Limited is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 220