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Flickers – Midnight Musings from a UK fund manager

Posted by: Brian Dennehy
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Last week was interesting.  By last Friday evening (the 9th) one UK fund manager, aided by a glass of something medicinal, was almost optimistic about unfolding events – almost…

This week we have seen a few flickers – like in early June – we have seen a positive step forward.”

But his optimism was constrained.  “Obviously this is a short period of time - we have seen these short periods before, and then it has reverted back, so we are merely noting it, rather than calling a turn.”

Another glass of wine, and there were clearer bright spots.  The greatest encouragement, without clause, came from UK smaller companies.

“Small caps continue to see decent news flow… some of the small caps that had good results recently, but not moved, started to go higher. There remains plenty of upside in small caps – these moves are the tip of the iceberg… the average upside is close to 100%.”

It wasn’t just smaller companies. 

“Large caps have also started to move – banks have strengthened.  Banks have collectively repriced mortgage rates– a massive price increase.  Insurance has started to perform similarly. Some stocks that had been very weak have rebounded strongly e.g. National Express is up 45% in 3 weeks - Rolls Royce has doubled this week alone.

These moves show how polarised valuations are, but also how quick things can move.”

Indeed.  It is interesting that those larger companies on the move, or at least showing a flicker of life last week, are in the Value camp.

Looking more globally, he also noted that copper, a barometer for the world economy, had moved back towards 1-2 year highs.  [That is something to which we must return in coming weeks.] 

What about the big picture?  Biden.  Brexit.  Covid.  BBC. 

“The US election has tilted towards Biden which would be positive as the likely fiscal stimulus and policy action would be deemed inflationary [which is good for “Value”].  A Biden win would also pressure the two global hot sectors – pharma on drug price reform and tech on tax/regulation.

The mood music around Brexit has become more positive. This is a very fluid situation and we will see negative as well as positive headlines as we go to the wire on negotiations.

Both Biden and Brexit are going to be crystalized one way or another in the next 30 days.  A Biden victory and/or a negotiated Brexit outcome would be very positive [for our fund managers fund!].

Obviously the situation remains very fluid around COVID, and the related policy actions.

Yup!  At this point, feeling himself slipping into a minefield of Covid uncertainty, and with his glass now empty, he retreated to his bed.

Now, just a week later, the Covid uncertainty has crystallised into another hit for UK and European economies.  This Thursday (15th) stock markets did fall reasonably sharply (2-3%), but it is nothing like the falls in February and March – not yet anyway, and hopefully never.

But hope isn’t an investment strategy.

My central expectation is that in the next leg of stock market declines Value-style funds will more obviously be outperforming i.e. falling less than, say, tech and out-and-out Growth funds.  I must also be ready to adjust that expectation as events unfold.

I wonder how our fund manager will judge events each Friday in coming weeks, with or without the aid of something medicinal?  I hope he shares his thoughts again.

Topic: Market commentary


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