Alex Chappell
4th June, 2021
Blog, IC Insights
May Performance Update…
One of my fondest childhood memories was playing chess with my Grandad. I say ‘playing’… it felt like intense mental competition as an energetic 9-year-old, but hindsight would suggest ‘learning’, or being ‘taught a lesson’, are better ways to describe it. Now I’m certainly not talking as a grand master, but one of the things that stands out about chess is that its so interconnected. Moving one piece can create opportunities and threats all over the board. Its like an evolving puzzle that requires you to look multiple moves ahead whilst anticipating what your opponent may do along the way.
Markets are often a similar puzzle. The natural viewpoint is economies are opening up, which means growth improves, so markets should go up. That’s true, and is reflective of being ahead in the game, but any single move in chess can often put you on the back foot, and inflation and interest rates are the rooks and queens of the market puzzle – the most powerful pieces on the board.
The current state of play is a solid re-opening in both the UK and the US, with Europe slightly behind and most of Emerging Markets lagging due to vaccination efforts. The latter are crucial to turning Covid-19 from a pandemic to an annual flu-like phenomenon, though to really get to that position, we are likely to require everybody (including Children) to be double-vaccinated; even in the UK this isn’t likely to happen until the Autumn. In the meantime, cases will inevitably rise, so the questions are, by how much, and what are the knock-on effects on policy?
If they don’t rise that much, and June 21st goes ahead, we will see a stronger recovery, which could lead to more inflation. That would naturally suit the Covid hit sectors, but may be less progressive for some other sectors that have not been damaged and have in fact prospered, through lockdown restrictions. The opposite is of course true if cases rise quickly, and June 21st is delayed or worse, the roadmap is rolled back.
That isn’t our base case, but it’s a possibility we shouldn’t ignore, as the Covid hit sectors would then really struggle, to the continued benefit of areas like technology. If policymakers don’t react to a quick rise in cases, then that increases the risk further down the line, and if they overreact to a small rise, that restricts the recovery. And here we are just talking about the UK; as discussed earlier, every region has a different starting point.
This is the interconnected nature of the board we are currently looking at. We are positioned to enact our gameplan, though we are covering a number of moves that our opponent could make. We must keep our options open until we have a clearer direction, and at that point, our core pieces will make their move.
On the performance front, May was a month of two halves, with a challenging first two weeks followed by a strong recovery. Overall, the portfolios were around flat, though performance generally in the second quarter has been good so far, and the portfolios are up between 5.88% (Very Low Risk) and 21.93% (High Risk) since 31st May last year. We have also been very active in using the volatility (which we expect is here to stay) to our advantage, this month adding to some of our ideas which had become good value. These changes are like the pawn moves that set-up for bigger wins, but we need the environment to make its move first before finalising our attack.
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