Perspective

Recovery brings new risks


Over the past year, investors have learnt to live with the pandemic. After an initial panic, stock market performance clearly split between Covid “winners” (such as technology) and “losers” (leisure). The approval of a vaccine – months sooner than most anticipated – has more recently upset this re-classification of the investment world. Investors have now started to re-engage with those sectors that were hardest hit by the pandemic and ensuing economic contraction.

Cyclical recovery

We came into the year with an overweight allocation to “growth” sectors. These have generally emerged as Covid winners, helping us navigate the year successfully. We have now moderated this exposure through an allocation to funds with more of a “value” focus, while maintaining an emphasis on quality.

Performance of S&P 500 Growth vs S&P 500 Value, last five years, rebased to 100

600113_P6_Value-bar-chart.png

Source: Refinitiv Datastream, Cazenove Capital

These more cyclical sectors recovered substantially in the last two months of 2020 – but we think the rebound could have further to run. In the near-term, this would favour markets with more of a “value” bias, such as the UK. This would in turn lead to a broadening of global equity market performance, which in 2020 was very dominated by the US and in particular its large technology companies.

Over the longer-term, we maintain our conviction in the key themes that I have discussed throughout the past year. These include technology and healthcare, where we have exposure to specialist funds. We also expect to see continued pressure on governments to provide fiscal support, which should help infrastructure. The sector offers a compelling combination of stable, inflation-linked returns and the opportunity to benefit from the energy transition.

Maintaining our diversified exposure

In multi-asset portfolios, we maintain our allocation to government bonds and gold, both of which offer valuable diversification benefits. Today’s very low interest rates are supportive of these asset classes. With unemployment still at elevated levels in major economies, this is unlikely to change soon. However, we recognise that greater economic optimism could see defensive assets experience more volatility over the coming months.

The strong performance of gold, and US equities, has in some cases left with us with a slightly larger exposure to US dollars than we might like. To reduce this, we switched some of our gold exposure into a GBP-hedged vehicle, to limit the impact of currency swings for GBP-based investors.

More generally, we continue to see interesting opportunities within alternatives. Market neutral hedge funds are one example of this. Our research shows that they can provide attractive returns with relatively low volatility and low correlation to equity markets. Such strategies should be able to capitalise on a particularly attractive opportunity set at the moment, given the high degree of performance and valuation dispersion we see in equity markets.

This article is issued by Schroder Wealth Management (US) Limited, a firm authorised and regulated by the Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission. Registered office at 1 London Wall Place, London EC2Y 5AU. Registered number 10761882 England. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Schroder Wealth Management (US) Limited unless otherwise stated. For your security, communications may be recorded and monitored.

Contact the Americas Team

To discuss your wealth management requirements, or to find out more about our services and how we can help you, please contact:

Martin Heale

Martin Heale

Portfolio Director
Telephone:
martin.heale@schroders.com
Janette Saxer

Janette Saxer

Portfolio Director
Telephone:
janette.saxer@schroders.com