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SEI Investments: What vaccines, Brexit and geo-politics will mean for investors

Published: 12/04/2021
The global economy changed significantly last year and 2021 is proving to be just as uncertain. The manager of our VitalityInvest Global Multi-Manager funds, SEI Investments, asks: how well are your clients positioned?

When it comes to the havoc wreaked by COVID-19, the pandemic is still very much with us. The UK experienced a particularly sharp surge in new infections in December associated with a mutation of the virus that enhanced its transmissibility. Extended lockdowns which led to continued reductions in social mobility and economic activity has posed concern for struggling sectors, such as hospitality, leisure and travel, worsening fears of a double-dip recession.

Despite this, global investors are looking beyond the challenges of the year. Vaccines becoming widely available across developed countries worldwide have been enough to encourage a “risk-on”, pro-cyclical posture.

At the start of April, more than five million people in the UK had received their second dose of a coronavirus vaccine and health services across the UK administered over 36.6 million vaccines between 8 December and 2 April1. Further to this, the increased effectiveness of therapeutics to treat patients with COVID-19 adds hope that most global economies will return to some form of normality in the near future.

The skinny on the skinny deal

Six months ago, investors faced uncertain outcomes from both Brexit and the US elections. Today, there is much greater clarity.

The UK’s departure from the European Union promised to be messy and full of uncertainties from the start. Negotiations went on for as long as they possibly could before 1 January when the Brexit withdrawal agreement was implemented.

The result is a “skinny” deal that allows the UK to gain preferential access to the EU market for its goods, providing that it follows many EU rules and regulations involving governance, labour and the environment. If those standards change in the future, the UK will be permitted to deviate from them and will be able to challenge future disputes in an independent court.

The zero-tariff/zero-quota trade arrangement comes at a cost since businesses that trade with the EU will now be burdened with additional expenses and red tape. Although politicians and the media will likely point to tariff-free trade, the UK’s significant—and higher value-add—services sector, which accounts for about 80% of the UK’s economy, will face challenges in continued access to the single market.

In short, the deal avoids the prospect of an economic rupture but comes at the cost of increased trade friction and ongoing uncertainty in several important areas.

The market’s response to the deal has been relatively muted, although is not easy to disentangle from the ever-changing news on COVID-19. Investors have had four years to digest the economic damage from Brexit; it is well understood by now, and we believe it is reflected in the prices of UK equities and currency. Still, the newfound clarity should be a positive for markets (and investors) going forward. The agreement provides some certainty on tariffs, and the government’s trade negotiators have already fanned out across the world to make sure that the UK retains the same trade agreements that it has enjoyed as a member of the EU.

The ‘Great Rotation’

The rollout of vaccines has energised the rotation into cyclical stocks. It should surprise no one that growth and momentum stocks were the big winners of 2020. Although they represent separate investing styles, growth and momentum portfolios are currently dominated by information technology (about 40% of both), with the communication services, consumer discretionary and healthcare sectors also well represented in both.

The big laggard has been the value style. Again, this is not a surprise. This index has relatively low exposure to the sectors where strong performance has been concentrated. It also suffered from having high exposure to financials, amounting to nearly 20% of its market cap. Value has been trailing other investing styles for a long time. In fact, its relative performance actually peaked in March 2007 when the global financial crisis began to hit the financial sector with its full fury. The pandemic of 2020 has had a similar impact.

In terms of relative total-return performance, the value style has underperformed growth by an even greater degree over the past 13 years than during the 1990s when the tech boom was revving up.

Changes in stock market leadership in favour of cyclical and traditional value sectors often occur around recession periods; the long period of mega-company, tech-stock outperformance since the global financial crisis led to extremes in both valuations and market-cap concentration that, in the past half-century, were exceeded only during the peak of the Nifty Fifty craze in the early 1970s and the tech bubble of the late 1990s.

While conceding that tech and other stay-at-home stocks were big winners as a result of the pandemic, we note that even the best companies do not stay the best stock market performers forever.

Looking ahead, we believe there are several reasons there could be a major change in investment regimes. These include a deceleration in the earnings growth of the favoured few from superfast to merely fast, an acceleration in the revenue and earnings growth of the laggards in response to a vaccine and the ramping up of a return-to-work trend, a shift in the political winds that could lead to higher taxes and more aggressive antitrust enforcement against the big social media and other leading tech companies, and a rise in bond yields that would harm high-multiple growth stocks more than low-multiple value stocks.

This change in investing regimes played out in a big way in November and the first half of December, and we expect the nascent trend to reassert itself during 2021. The big moves in relative performance came on 9 November, the day Pfizer and BioNTech announced surprisingly strong efficacy results of their COVID-19 vaccine. No one knows if this is the turn in the relative fortunes of these investment styles, but we think investors will prove willing to shrug off the likely prospect of more bad news during the difficult days and months ahead in the world’s battle against the virus. The focus will turn instead to the rising odds that the world will be in a better place economically as we enter the second half of 2021.

Insights from SEI’s article were taken from their report titled ‘Change can be uncomfortable, but it doesn’t have to be’.

VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority. 12/04/2021 | This article’s view is based on the law, practices and conditions as at the day of publication. While we have made every effort to ensure they are accurate, we accept no responsibility for our interpretation or any future changes.


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