8th November 2024
We’ve had another brief hiatus from any communications until the outcomes of the seismic political events on both sides of the Atlantic move into the rearview mirror. The UK Budget and US election have caused paralysis in financial markets for a few months now with many choosing to sit on their hands until both are out the way. Perhaps it was because both results have been so hard to predict as well as crucially, the impact of those results on financial assets, that this inaction has been so pronounced. Our stance is always to avoid positioning portfolios to benefit from the outcome of a binary event, mainly because a well-diversified, multi-asset portfolio should be able to withstand any shocks arising and benefit from any positives that emerge. But also we are deliberately nimble enough to be able to react quickly once the facts are out and we can focus on the ‘known knowns’.
So what have we done in response? Not much in truth. The UK Budget has been covered extensively so there’s not much to say other than the bond market didn’t like it very much, illustrated by the UK 10 year gilt yield rising to the same level as in the aftermath of the much-criticised Truss/Kwarteng budget albeit it has been travelling to that level slowly over many months. The impact of that higher bond yield on the UK stock market and the alternative income segment of the investment trust sector has been savage. Some infrastructure trusts and Real Estate Investment Trusts’ share prices are down more than 10% since the start of October, which has pushed their discounts to net asset values even wider and their dividend yields to greater premia to the risk-free rate. For example, core infrastructure trusts with the majority of the income derived from government index-linked contracts now yield in excess of 6%. HICL Infrastructure yields 6.8%, BBGI Infrastructure yields 6.3% and International Public Partnerships 6.4%. These yields are not only well above gilt yields (both nominal and index-linked), they are above corporate bond yields but with better counterparty risk. In a world of elevated global equity valuations, we are firm believers that natural and secure income is going to be an important foundation of future total returns Although we have plenty of exposure already, we have modestly added to the infrastructure allocation.
Given Trump’s campaign centred on lower corporate taxes, increased tariffs and a reversal of the incumbent “green” agenda, the positive US stock market reaction on news of his victory was not a surprise. Large cap US shares were up more than 2%, smaller companies move than 5% and the US dollar was, surprisingly, stronger against most major currencies. Gold was down and Treasury yields rose. The lack of fiscal responsibility was common to the campaign rhetoric of both Harris and Trump but on balance, the bond market clearly viewed Trump as the more aggressive of the two: the 10 year Treasury yield jumped to 4.4%, a 4 month high. We are not alone in wondering why a spike in US bond yields does not prompt a negative reaction for the US stock market like it does for UK stocks when gilt yields rise. Perhaps investors are willing to give Trump the benefit of the doubt, with his other policy promises being positives that outweigh the higher cost of capital. We have learned on previous occasions not to trust the first move in markets (the US market initially fell when Trump won the 2016 election only to go on a sustained rally during his presidency), so we are keen not to overreact. Nevertheless, one thing that is uncontroversial is that Trump’s plans will be good for the US domestic economy, so we have added to our position in De Lisle America, a US small cap fund with a value bias. Where we had US bond duration, we have slightly reduced it due to the risk of greater than expected fiscal largesse under Trump that could send treasury yields higher.
Regardless of one’s view on the UK Budget or whether you are a Trump supporter, we are glad that both events are behind us and the UK market can get back to a normal functioning system that values assets on fundamentals rather than making decisions, or not making decisions, because of what might or might not happen at a political level.
Daniel Lockyer – Senior Fund Manager
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