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7 Minutes on Markets - Q2 2021 Market Update

Ben Kumar, Head of Equity Strategy, Uwe Ketelsen, Head of Portfolio Management19 Apr 2021

Join Ben Kumar, Senior Investment Strategist, and our new Head of Portfolio Management, Uwe Ketelsen, as they discuss the events of last quarter and the changes we are making to portfolios to increase our defence against the danger of bond prices.


Ben: Hello everyone, welcome to 7 minutes on the market. I’m Ben Kumar from the Investment team and I'm delighted to be joined by Uwe Ketelsen, our new Head of Portfolio Management. When I did this podcast a year ago, it was in something of a state of shock. We just started working from home, no one knew what was going on with COVID-19, it felt unstoppable, and I of course had no idea that would soon be working with Uwe. So, with that in mind, what are the differences Uwe now? How's the first quarter of 2021 been in comparison to 2020?

Uwe: Hi everyone and thanks for the kind introduction Ben. Personally, my first quarter was obviously great because I joined 7. But in market terms, well this year's first quarter was very different from last year's first quarter in many ways. This year's first quarter saw a continuation of the rally that started last year, and basically anything equity would make you money particularly in the US. It saw a lot of continuation and strengthening of the changes and trends that we saw last year where certain sectors and styles were doing better than others before the COVID shock. So things like energy or financial services have now taken over from things like technology or consumer staples for example and the more value styled investing, the more cyclical investing is doing much better than gross styling and holding a more defensive stock. At the same time, the federal reserve in the US has confirmed they want to stick to easy money policies but inflation and expectations have picked up in the first quarter and bond investors had some losses. Which really makes me think Ben, what does the rest of the year hold?

Ben: It's absolutely the right question to ask and I'm going to say something that sounds a bit strange, which is that COVID-19 didn't cause the recession we saw last year. It’s important to remember that because it wasn't the virus, it was the response to the virus, lockdowns from governments and across most of the world, lockdowns are ending or at the very least, easing. And as they end, people are finding themselves in a bit of a strange situation. Because after most recessions, people don’t have cash in the bank, they possibly don't have jobs and there's not a lot of confidence. That's not true this time. Government responses, stimulus furlough schemes, I mean the people have lots of money in the bank, many people have jobs to return to or will do soon as restaurants and bars and things open up, and there is this desire to get out there and spend. In the UK, there’s about £100 billion more than normal sitting in current accounts and savings accounts, and we think that the consumer demand will be huge. You’ve already seen it as we sit here in the first week of outside bars opening and hairdressers opening, people are queuing, they are desperate to get back in them. We think that's going to be true all over the world and we think this level of spending is going to create a boom in the cyclical part of the global economy. It’s one thing to think that, quite another to get access to that trend in portfolios, but we do have a few ideas, right Uwe?

Uwe: We do, other than my first idea is to get a haircut, there are also things happening in the portfolios. So we felt in somewhat defences first of all, against the danger to bond prices that I referred to earlier, we’ve increased our alternatives allocation further. We’ve also added in a so called “put right” strategy, which in a nutshell, there's a further pocket gains from equity investments in line with what we think we can realistically expect over the coming months. But it also gives us some buffer for any temporary market setback, which we should expect every now and then. But then coming back to the point Ben that you made a moment ago, yes, clearly we want to participate in this continuing and strengthening sustained growth path. So one thing we've done, we’ve further added to our allocation in Berkshire Hathaway, which has been doing very well already since the initial allocation last year and we are also adding to our exposure on the values side of things. Maybe Ben you want to illustrate a little bit on what this really means in practical terms?

Ben: Yeah sure, so Berkshire Hathaway is very simply about as pure exposure to the US cyclical economy as you can get. Warren Buffett has always talked about the powerhouse of the US economy and his investments are in line accordingly. You've got railroads, you've got consumer stores, you've got financing companies, all of those stand to benefit as the world opens up and people get back to doing what they love. In the global value allocation, it’s a little bit more nuanced. Rather than tilting towards sectors like financials or industrials or energy, it's looking for the best, most cyclical companies, in each sector. So you do have a weight to technology, but you're buying the likes of IBM and Intel, processor makers rather than Microsoft. You’re buying car makers like Toyota, rather than Tesla. It's all of those, typically very well-established companies, who sell the kind of consumer goods and services that we’re all so desperate to go out there and spend our money on. As this boom really takes hold, we think investors are going to be surprised by the growth numbers and by the confidence that we see. So we believe that over the next year and probably into 2022, there’s going to be a lot of available returns and we hope to benefit from that, from our cyclical exposures. We’ll keep you updated next quarter on how it's going. But for now, have a great start to the summer.

Uwe: Thank you.

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