Keeping a balance in portfolio's is crucial

  • 23rd September 2020

What has happened

Market leadership for defensive growth has been firmly re-established by the introduction of further restrictions as Europe enters winter after a protracted summer.

UK restrictions re-introduced and the Bank of England tries to pass the baton

Yesterday the UK Prime Minister announced a series of measures to slow the pace of coronavirus growth. The primary change was that of tone with the government shifting to a path of further restrictions rather than liberalisation. Whilst the government has kept a full lockdown on the cards, it was emphasised that this was not the desire of the government but served as the stick to follow up the call to civic responsibility. Andrew Bailey, Governor of the Bank of England urged the government to ‘rethink’ the furlough scheme and provide targeted support to areas of the economy. This came alongside a stated unwillingness for the UK central bank to experiment with negative rates in the short term. Taken as a combination, the Bank of England are eager for the government to do the majority of the heavy lifting in the next stage of the stimulus response but we still expect further asset purchases to be announced before the year end.

Leadership for the stay-at-home trade

The future of Value vs Growth and Cyclical vs Defensive relative performance has been the source of much debate. Cyclical valuations have been hard hit by the coronavirus pandemic as growth rates for 2020 fell and Value valuations, which have already struggled in the post GFC low rate world, re-rated again as US rates closed in on 0%. We have seen some nascent recoveries as the market has rallied from its March lows however as restrictions start ramping up ahead of an expected second wave over the winter, this has reversed again. Until we see positivity build around an economic recovery and an ‘end’ to coronavirus these sectors will remain under pressure.

What does Brooks Macdonald think

As ever, balance is incredibly important. Few can argue that value and cyclical sectors are extremely cheap by historical standards but given the current backdrop they are understandably cheap. Their cheapness does mean that there may be upside ‘risk’ if we see meaningful vaccine developments or improvements around the COVID-19 backdrop. For this reason we are keeping a balance in portfolios between our growth positioning, which we continue to favour for the short term, and our value/cyclical holdings.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.