INVESTMENT CLOCK – DECEMBER 2020
Multi asset funds are overweight in equities with a very large overweight and global high yield bonds are also slightly overweight commodities and we’re underway in commercial property, and cash primarily.
The more diversified mix of asset classes we include at Royal London has meant that we have underperformed some less diversified competitors, relying more on global equities and guilds for returns in 2020, but we think the mix we have will be more resilient, and what we think could be a more inflationary post-COVID recovery.
If we look at the Investment Clock, we've really gone full circle in the space of six months, and economic cycles, normally, a five-year event and, sometimes, you get, these two year, many, cycles caused by Industrial Production, strengthening, or weakening. And what we've seen is the full cycle, pretty much, since March. So, we had a collapse and activity, a collapse and inflation, and that move the Investment Clock to the bottom left-hand corner, where government bonds are doing well. And then we saw the big bounce back in the economy as social distancing measures were eased in the autumn growth and inflation picking up. We think with the vaccine coming through 2021 will be a strong growth year so it won’t happen straight away but eventually the vaccine will get out there in enough quantity that we’ll see less, and less social distancing and more and more economic activity supported by what is very loose, fiscal and monetary policy. And that Outlook should be good for equities. Good for global high yield and we think also good for commodities.
In the short-term, they were a little bit worried that investor sentiment is perhaps a little bit too bullish and there are some short-term risks that the virus is searching in a meaningful way in America, which could cause more lockdowns over the winter.
We've also got some geopolitical risk in the shape of Brexit and also the fact that we're not having exactly a straightforward transition of power in America maybe Donald Trump will have a few more surprises for us before the January inauguration of Joe Biden.
But the general mood we've got here though, is if we see a meaningful drop in markets were likely to add to positions rather than reduce them. Regionally, we really don't have any great preferences right. Now historically we've been overweight the US and the emerging markets, mainly Underweight UK, equities and European equities but that's the beginning of what could be a major rotation from the growth stock when as of 2020 like technology, which is really boosted the US market towards value stocks in areas that have been really crushed by COVID and ought to do better next year. And as a result, we're poised pretty neutral in terms of our country exposures. And if we see a situation where there's a strong recovery, with bond yields allowed to rise, you could see a very big rotation towards the value sectors and towards the markets like the UK and Europe.
Looking forward, we think the recovery will be more inflationary, there's lots of loose policy in the system, we’ve got commodity prices, beginning to pick up, the Chinese economy has been recovering strongly. And governments have an incentive to want inflation to rise a bit, to get rid of some of the debt they've been building up. So, we do think having this broader diversification with asset classes like commodities, with commercial property, which we're expecting to start dropping out sometime next year, and the bigger allocation to UK equities. We think that could do really quite well next year.
So, diversification is what we're all about, improving resilience, tactically we’re overweight equities, possibly looking to buy dips. In the next year, the big question is bond yields rise or not. If they do this as big rotation into value sectors that can prove quite choppy for overall markets. If bond yields can stay low then I think its another good year for stock markets.
If bonds, you can stay low that I think it's another good, you have to stock markets.
The clock's horizontal axis, left to right measures inflation while its vertical axis indicates economic growth. In simple terms, the economic cycle moves through waves, from prosperity to decline, with central banks inflating or deflating monetary policy as a means of stabilising activity within the economy.
Source: Royal London Asset Management, for illustrative purposes only
Tracking the movement through each of the clock's quadrants: Reflation, Recovery, Overheat and Stagflation, can guide rotation across assets and sectors.
The Governed Portfolios and Governed Retirement Income Portfolios (GRIPs) are risk-targeted centralised investment propositions with a strong emphasis on investment governance. The tactical asset allocation of each of these portfolios is delegated to Trevor Greetham by the Investment Advisory Committee (IAC).
Our Investment Advisory Committee (IAC) meets every quarter to review our risk-graded Governed Range and fund range. Read the summary notes from their most recent meetings.
The Investment Clock is just one of a range of tools that makes our tactical strategy more robust and more active based. It also brings an additional layer of expertise and strengthens the investment process of our Governed Range.