Market Update
13 NOVEMBER 2020
This summer was a busy period for the research team. Amongst our collective conclusions was that the return potential for absolute return strategies had substantially reduced. ‘Core Fixed Interest’ has replaced several investments within the absolute return sector of our portfolios. Core Fixed Interest will do little more than keep up with cash until the environment becomes testing and then it can provide some diversification, when it is most needed which was not wholly available in absolute returns.
There is a growing acceptance that COVID19 is here to stay for the medium term and a return to ‘normality’ is some way off. Markets have continued to show remarkable resilience, but we believe more volatility is on the horizon. Part of this will result from COVID19 news flow but the aftermath of the US Presidential election will also drive short term market sentiment.
It remains our view that Brexit negotiations will go to the wire. Our base case is that a deal will be done; it is not in anyone’s interest not to happen. Even if we do leave on a World Trade Organisation basis, it is likely a deal will be concluded shortly after. Sterling will move on this news and whilst the UK stock market is cheap on a relative value basis compared with most other developed markets, its biased structure towards old economy sectors leaves us indifferent at best.
Where we are much more optimistic is regarding the opportunities arising within alternative income. We are mindful of clients’ needs for income and seek to fulfil this requirement. Yields from most asset classes have fallen and, if not, there is a reason - real default risk. Global interest rates have cratered and will not move for years but the one bright spot is government backed cash flows in alternative income.
We have been early adopters of investments in this space and have watched the sector grow in recent years. New opportunities here have emerged recently, as the Initial Public Offering market opens again. Currently there are three new ideas and existing ones are coming back for further capital raising. These ideas range from a homelessness solution, to a music royalties trust. Asset backed index linked investments that can potentially yield more than 5%, once fully invested, are attractive given our return targets. Even for the non-income investor, the potential for a Net Asset Value total return in the mid to high single digits is striking.
If you have any questions, please get in touch with your usual CAM contact.
James Calder
Research Director
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