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Q3 2020 Market Commentary
USA elections, 2021 Outlook, ESG Portfolios and much more
It has been surreal for all of us to experience this year’s holidays with limited family gatherings and shul services. We hope that you managed to make the most of the challenging situation. Israel's virus position is indeed precarious and it is clear this is not a short-term problem as we initially hoped. We remain vigilant in terms of our portfolio positioning and risk management. We do believe that there are tough economic times ahead; however, we do not believe we will see another market panic scenario as we saw in March 2020. In the following commentary we will address the global market YTD and outlook, upcoming elections, ESG investment and other interesting updates and developments.
Global Market Year to date
September 2020 was a reminder of how volatile the market can be. Following a very strong August on the equity market, led by the USA technology giants, the market gave us some worrying days in September. Needless to say, we felt very comfortable with our equity underweight position in September.
In the table you will find a summary of the main index returns year to date and a reminder of how bad these indices were in March.
Year to Date
in March 2020
S&P 500 Equity
FTSE 100 Equity in GBP
Emerging Market Equities
High Yield Bonds
Global Investment grade bonds
High level of uncertainty continues, mainly due to the unknowable path of the virus and the expected effectiveness, if at all, of the soon to be released vaccines. We believe markets will continue to enjoy and be supported by a policy-induced recovery, but legitimate question marks do exist on the sustainability of a policy-driven recovery given the virus overhang. This, coupled with the upcoming presidential election in the USA, certainly leave us with enough to worry about. The market is behaving as if it has already received its vaccine, as the valuations are indeed rich. Looking at your portfolio, it is too easy to forget we have had the most significant drop in global GDP since the great depression of 1929.
Outlook and USA Elections
The base case for the upcoming election is a Biden victory and a Democratic clean sweep retaking control of the senate. Most objective polls conclude as such. These were the same objective polls that predicted Hilary would win in 2016, so we need to be cautious.
If that base case materializes, we believe the market will not like the uncertainty associated with such a dramatic a change of control.
A Republican Senate blocked many of Obama's initiatives. If there is a Democrat White House, Senate and House of Representatives, we may see some truly significant changes in terms of taxation, police reform, immigration, healthcare, and environment issues. Not to mention significant foreign policy changes.
Historically, looking at every election year since 1945, on average whenever the incumbent loses, the market is negative in that quarter (i.e. Q4). Therefore, we will likely remain underweight equities through to the end of the year.
Our asset allocation positioning this year, which includes a general significant underweight to global equity but with an overweight to USA and technology, has really contributed positively. However, being Strategic Asset Allocators at heart, we do feel we need to get back to full equity positions sooner rather than later. This is more for 2021.
A big discussion point is inflation, as many believe that the outcome of the policy response must be inflationary. This leads investors to Gold, however we have serious doubts if gold will protect from inflation like it did in the 1970's. The market move in gold from a high of $2,068 in June to $1,863 in September reinforces this doubt. We much prefer equities to commodities to protect from inflation.
We like China and taking a longer-term view we are planning more broad Chinese market allocations in our portfolios. China not only will become the largest economy in time, but it is less correlated to USA equities than other global markets and therefore we are comfortable increasing our exposure in China. It will be extremely difficult to get the timing of this right as understandably one tweet from the White House can send Chinese markets down. However, when taking a long-term view, the initial start point is less relevant.
We are comfortable with our High Yield Bond, Emerging Market Bond and Subordinated Credit exposures. Investment grade bonds present a new challenge. Since this is usually the biggest "chunk" of a private client portfolio and forward looking yields have been compressed significantly, one needs to have realistic expectations going forward. We therefore recommend clients to have a serious discussion with their Personal Wealth Manager to understand if they can handle more risk in their portfolios or not, in order to achieve higher potential returns than if they remained conservative in lower yielding quality bonds. If not, then 2021 may require some patience in terms of yields on this part of the portfolio. We are actively seeking some unique solutions, e.g. low risk Structure Notes.
Alternative investments continue to be relevant with different risk/return profiles. Currently, we favor Structured Notes and secured credit. Equity property is also possibly relevant on a case-by-case basis. Consumer credit is another preferred vehicle, but investors may wish to wait a few more months to see where the policy is going. Unfortunately, these alternatives all require a certain client size and eligibility.
One of the biggest trends in today's investment world is ESG (Environmental, Social and Governance) investing. This means placing a different set of priorities on investment selection criteria, but without compromising returns. ESG investing means different things to different people and there are many details to master, for example, how are the very subjective criteria and definitions defined and managed? How to prioritize the E, S and G when they may conflict with one another? Is it real or a marketing bluff? As a result of both developments in the industry globally and requests from clients that their money work for them more ethically, we have expanded our research efforts to include an independent selection of ESG products to work alongside our current Asset Allocation strategies. Currently, we are not replacing the one with the other. If you would like to learn more about the possibility of investing in ESG solutions or including ESG in your portfolio, please feel free to contact your Personal Wealth Manager or watch the ESG Investing Webinar we held recently (along with other webinars).
Developments at Pioneer
As many of our clients know, being historically an Anglo Saxon firm in Israel has given us a unique opportunity to provide services to the global Jewish community with some connection or affiliation to Israel. As the financial world has developed and become more regulated, Pioneer has expanded its regulatory base so that we can provide the same types of services in more and more jurisdictions. We are Authorized Financial Services Providers in Israel, USA, Canada, South Africa, France and Switzerland. We are pleased to announce that now we can add the United Kingdom to this list.
In terms of adapting to "the new normal", Pioneer is fully operational with over 90% of staff working from home on any given day.
Israel Markets at a Glance
Israeli markets are behaving more like Europe than the USA so far, and have not shown the strong recovery that the USA has shown. The bond market has also not fully recovered, as major doubts exist over the short-term balancing act the government has to play between shutdowns to control the virus and strangling of the economy. Therefore, Shekel denominated portfolios are lagging a USD denominated portfolios, year to date. There is no easy way through this, and our government system makes it only more difficult to create the unified leadership required. We believe interest rates will stay low and this will give the capital markets significant support, however Israel has a long road ahead for a full recovery of the economy to 2019 levels. The Biden advantage in the USA election and the continued power battles locally will continue to be a drag on recovery, in our opinion. We believe the Israeli government will have to do more to get the economy back to where it needs to be.
The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.
Mike Ellis Thursday, 01 October 2020. Quarterly, half year and year-end review
About the Author
Director and Chief Investment Officer
Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.
Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.