Monthly Market Outlook

The importance of careful stock-picking

October 2020 (Click here to download)

Equity prices have recovered from the lows in March – a remarkable comeback amid so much uncertainty. But high valuations mean less opportunity for future returns and more risk for investors, so where do we go from here?

As equity markets rise, so does risk for investors

When the Manager chooses to invest in a company, it does so by looking at its growth potential and its ability to make money over the longer term (around 10 years). The higher a company is valued, the lower its potential return, unless its earnings growth is strong enough to compensate.

As the market crashed earlier this year, the price of great companies plummeted, and investment opportunities were abundant. Back then the Manager forecast an average market return of 10% per year over three years, but those returns were actually realised in just six months. Such a dramatic recovery is clearly a positive outcome for those invested, but with prices now at elevated levels, investors are having to accept lower returns in the short term unless they take on greater risk.

Why careful stock-picking adds value to portfolios

When the Manager builds and manages its portfolios, the decisions it makes are based on its own rigorous research, and its view on how individual companies are positioned for the future. By taking such a granular view, it can spot opportunities that might be missed if constrained by a benchmark or a particular region or sector.

Every stock the Manager invests in must continually earn its place in the portfolio and provide the diversification that is needed to achieve growth and manage risk. For example, it recently reduced its exposure to Facebook, and reinvested in Becton Dickinson – a business with the same expected earnings potential, but with a higher return potential due to a lower valuation. It’s by consistently making sensible decisions based on continuous analysis of the data that it can add value over the long term.

While the Manager monitors its performance against a variety of Indices and its peers, it believes its approach gives it an advantage. That’s because the Manager can make informed decisions while insulating its thinking from the noise of the crowd, or the arbitrary construction of an Index. The Manager has the flexibility and freedom to seek out hidden opportunities, which is particularly helpful when markets are expensive and good returns are hard to find.

With markets riding high, passive investors should have low return expectations from here, although good companies can still deliver. Active investors, who make sensible decisions based on solid analysis, can still generate good returns, and that will continue to be the Manager’s focus.

“The gap continues to widen between the performance of financial markets, and the subdued outlook for the global economy. It’s important not to get carried away by the apparent confidence in equity markets since businesses continue to be supported by government intervention. Now, more than ever, caution is the order of the day and our key focus is on controlling risk while finding opportunities where they exist.”

Philip Smeaton
Chief Investment Officer

53%
Growth in the MSCI World Information Technology Index between 31st March and 31st August,

showing that every crisis has its winners and losers.

Source: Bloomberg

Investment View: is the UK lagging behind the global economy?

With the recovery in UK equities seemingly trailing that of global stocks, should we be concerned for the future of the British economy or is this an investment opportunity?

UK versus global equities

As can be seen from the chart below, when comparing the performance of UK versus global equities, we find an alarming picture of a country that appears to be significantly lagging the rest of the world. With Brexit negotiations still in full swing and the economic impact of Covid-19 yet to be fully realised, the Manager wouldn’t blame you for thinking the UK economy is in significant trouble. But as investors, the Manager needs to be careful not to jump to conclusions and, instead, dig beneath the surface to understand what’s really going on.

Source: Sanlam, MSCI, Bloomberg

The UK market is representative of the global opportunity

One of the reasons for the difference in recovery is that the UK market doesn’t have the same level of exposure to large technology companies and high growth businesses (which have been benefactors of the Covid crisis and responsible for much of the upturn) as other parts of the world. Instead, the UK is heavily skewed towards sectors such as financial services and energy, which have yet to find their feet. This doesn’t mean the UK is in a bad place. It just means the constituent parts of the UK Equity Index are currently out of favour.

But is the tide about to turn? Value in the technology sector has largely been realised, and investors – like Sanlam – who are unconstrained by sector and region can now look elsewhere for opportunities. So far, this year, the UK has served us well, and has been one of the best-performing regions within the Manager’s portfolios. Why? Because its approach meant it could find some fabulous companies that are extremely well positioned for the future, but had been swept aside amid negative sentiment.

Source: Sanlam Private Wealth

Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd.

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by Sanlam. Any expressions of opinion are subject to change without notice.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Disclaimer
This document is intended for use by professional financial advisers only. The distribution of VAM Funds and the offering of the shares may be restricted in certain jurisdictions. Private investors should contact their financial adviser for more details on any of the products featured. It is the responsibility of any person in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdictions. Prospective applicants for shares should inform themselves as to the legal requirements and consequences of applying for, holding and disposing of shares and any applicable exchange control regulations and taxes in the countries of their respective citizenship, residence or domicile. Click for Important Information