2021 Outlook The Year of Renewal - Luna Investment Management
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2021 Outlook The Year of Renewal Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.
Introduction
Welcome to the first Luna Investment Management annual outlook document.
2020 was a year like no other, it impacted our lives and everyday life. The
lessons and experiences from 2020 will not be leaving us anytime soon, but
it is time to look forward to what 2021 has in store. In this document we will
take a look at the key asset classes, the market backdrop, and provide more
information on the Investment Philosophy and current views from the Luna
Team.
We see plenty of reasons to be positive as we enter 2021;
• Some key risks are moving into in the rear-view mirror; the US election,
Covid-19 and Brexit.
• The deployment of vaccine(s) will see a gradual relaxation of restrictions,
confidence return and economic growth is likely to accelerate.
• Central bank policy remains very accommodating and is a major pillar of
support for both bonds and equities.
• Additional fiscal stimulus on top of the enormous support for business as a
result of the pandemic thus far is anticipated.
• Trade headlines are likely to be more constructive under President Biden,
compared to the Trump era.
• The possibility of a global investment boom driven by the new energy
transition.
• Potential of positive earnings surprises from 2020, as the recovery gathers
pace.
Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.
Equities
Based on vaccine production estimates, we expect This view is based on cheap valuations and also
both a relaxation in restrictions and a recovery in the the ‘cyclical’ makeup of the UK equity market. The
consumption of services, such as travel and eating valuation gap should narrow as the recovery gathers
out, in the first half of 2021, albeit with regional / momentum on the back of vaccines.
national lockdowns likely to remain in place over the
first months of the year. This should drive a recovery
in corporate earnings – the market anticipates around
30% growth in earnings per share for the S&P 500 in
2021 to $167*.
Although some of the recovery is priced in, valuations
are not as high as some commentators suggest,
outside of the technology sectors. Meanwhile liquidity
remains high and fixed income yields low, so asset
allocators could continue to add new money to stocks
and seek other areas for diversification purposes. This
is against a background of a reduction in supply of
publicly listed companies over the last ten years.
Of more interest is what the trade deal will do to
Small and mid-cap stocks should also benefit from investor sentiment overall. We believe as we move
improvement in economic conditions. These stocks through the year that this will likely remove much
tend to outperform their larger peers in the early of the uncertainty for international investors and so
stages of an economic recovery and are currently may entice such investors back to the UK. Given
attractively valued. We have exposure to these that over 75% of FTSE 100 revenues are generated
themes globally and in dedicated UK and US funds, outside the UK (and not through exports), the direct
the T Rowe Price US Smaller Companies fund in one impact of the Brexit trade agreement on UK large cap
example. equities should be relatively muted. Some companies,
which produce in the UK and do export, may be more
From a regional perspective, we see upside in the UK, affected initially. But companies adapt over time
even after the rally in Q4 2020; owing to changes to their operational situations.
UK trades at a discount to global equities We therefore believe the outlook for the UK market is
more favourable than it has been for some time and
1.2
this is reflected in our portfolio allocation. We favour
1.1
the large cap index of the FTSE 100 over the FTSE
1
250 mid-cap this is because the mid-cap index trades
0.9
at a higher valuation to the FTSE 100. That said,
0.8
domestic names should also do better as the economy
0.7
reopens, and this broad-based approach is reflected
0.6
in our allocation. Our active approach includes taking
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MSCI United Kingdom NTM PE/MSCI AC World NTM PE Long-run Average
advantages of discounts on investment trusts as well
Source: Refinitiv Database, UBS as at 1st December 2020 as direct stocks and other active funds.
A Focus on Quality
For all investments that we have in your portfolio, We also continue to avoid highly indebted businesses
whether that be collective funds, investment trusts or – we want to invest in companies that can not only
individual companies – there’s one thing central to our survive this environment but come through the other
view that remains unmoved; focussing on quality. side thriving. We do not want to take significant risks
to benefit from the very short term bounce-back in
This means that we are not being tempted into share prices of companies that continue to operate in
particular areas of the market that look cheap but difficult environments.
are structurally challenged. A good example of this is
retailers that continue to see their market share drift We continue to see and meet with managers however,
away as the move to online has only accelerated in and we will not invest with them if we have any
2020. concerns on the quality of the management team or
the process that they deploy.
Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.
* Yardeni Research, Inc December 2020
Bonds Central Banks and Government Support
The actions by central banks means that the yield on The role of the global central banks in today’s markets
government, corporate and “high yield” bonds is close cannot be understated and perhaps the saying ‘Don’t
to record lows. fight the Fed’ is more apt today than ever before.
In fact it is a very strange feeling that low (but The Federal Reserve’s position remains vital through
positive) yields for UK investors are welcome because its role in both setting the availability and the cost of
there is a staggering $18 trillion* of negative yielding credit.
debt available to investors. That means you are
actually paying to invest in debt, instead of being paid In short, we believe Chair Powell at the Fed
a coupon. will ensure credit remains plentiful. The Fed
has committed to keeping rates on hold for the
Against this backdrop, investors remain challenged foreseeable future. Former Fed Chair Janet Yellen’s
to boost the yield on their portfolio – the US inflation appointment as First Secretary to the Treasury is
break-even level is around 1.8%, which is below the likely to also be an important appointment in ensuring
Fed’s 2% target. On the one hand this indicates that the fiscal side joins monetary policy in getting the US
investors do not believe inflation will be an issue in Economy back on its feet.
the short term. The impact of demographics, debt and
technological disruption may continue to suppress Closer to home, UK interest rates look set to remain
inflation overall. If this is so, this means that interest low for an extended period of time. This presents
rates will stay low and so the return on the fixed challenges to clients with cash – the impact of
income part of investor portfolios. inflation has a bigger impact as time goes by. This
also led at the end of 2020 to National Savings and
We believe investors looking for income can invest in Investments cutting rates.
emerging market sovereign bonds. Additionally, ‘green’
bonds have shown more defensive characteristics With interest rates already on the floor – we must
and higher average credit ratings than the broader look to governments and fiscal spending to stimulate
corporate bond sector. fragile economies from the shattering affects Covid
has left.
We use a dedicated ‘ethical’ bond fund, but it is
worth noting that all our funds are screened for Record stimulus plans have already been announced
their ‘sustainability’ credentials by our research across the world and there seems to be a theme of
partner, Morningstar. Dividend stocks also can offer green based infrastructure which is likely to ripple
an attractive source of income, suggesting lower through in 2021.
allocations to fixed income compared to the past.
Amount of Negative Yielding Debt Globally in US dollars
20
18
16
14
12
10
8
6
4
2
0
2015 2016 2017 2018 2019 2020
Source: Bloomberg Barclays Global Agg Neg Yielding Debt Market Value USD from 11/30/2015 to 11/30/2020
Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.
* Bloomberg - World’s Negative-Yielding Debt Pile Hits $18 Trillion Record - BloombergSustainable Investing
Sustainable investing has experienced high levels of investor interest over recent
years. Climate awareness is driving this trend in equities - for example, the
Australian bush fires mobilised people, business, and government to act. Climate
events drive growing shifts in policy and behaviour, such as increased investment.
This investment alongside technological advances that are lowering cost of
green technologies, makes ‘green’ stocks increasingly attractive. This will not
be without cyclicality but firms that manage environment, social and corporate
governance issues better than peers will likely benefit. These benefits will likely
be in lower cost of capital and, all things being equal, improved profitability.
The health crisis has laid the foundations for a massive European monetary and
fiscal climate package that will be implemented in 2021. The ECB has pointed
out the importance of climate change and will take proactive measures, such
as favouring ‘green’ bonds in its bond buying programme, likely punishing high
carbon intensity activities.
This has the potential to start a new trend in equity markets. Perhaps it is
possible that ‘sustainable’ stocks could in time become some of the world’s most
valuable companies. Indeed, Tesla is well on the way.
Looking Longer Term
When investing, our clients are not thinking about estate to agriculture and e-commerce.
the next quarters earnings or short-term profits –
therefore it is important we do not think like this • Healthtech – The population of over 65s will
either. We are looking for long term structural double to 1.5bn between 2019 and 2050*.
changes that are happening and looking to invest in Technology will pay a role in meeting increased
companies well placed to leverage off these changes. demand for healthcare and the growth rate
for the sector looks robust. We note that the
The world was changing rapidly even before the valuation of the US healthcare sector relative to
pandemic arrived, so it is important that we also try the S&P 500 is at its lowest level in 25 years.
to think beyond the short term. Indeed, the recent
announcement from Alphabet (Google) on the success • Greentech – The transformation across industries
of its protein folding project underlines this. is only beginning as regulation, investment and
subsidies strive for carbon neutral goals. This
The performance of large cap technology companies will require investment across clean energy and
from Amazon to Zoom has been one of the stories of batteries. This is not just the preserve of the new
2020. Whilst the outlook for cloud migration looks to companies – the large cap miners have a very big
have a long way to go, the general technology sector role to play in the speed of this change – copper
may struggle to repeat its performance in 2021. is a very large component in wind farms and
electric cars. The miners must also be embracing
We believe it is important that investors compliment a sustainable approach – Rio Tinto is one of the
cyclical exposure in portfolios with exposure to leaders.
structural growth markets.
Of course, there has been significant technological
More than ever, active investing becomes important. disruption already but technology penetration across
This structural growth may well be focused in sectors many industries remains low. The adoption curve is
undergoing a technological transformation across 5G, still early and digital penetration across sectors will
Healthtech and Greentech – businesses increasingly continue, creating opportunity despite the seemingly
focus on digital business models from retail and real large progress made in 2020.
Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.
* UN World Population ReportFinal Thoughts
This can often feel like a strange time, equity markets have rebounded
from lows, but the economic backdrop still feels awful. This is a function of
equity markets, they move in anticipation, looking through the short-term
concerns to a vaccine roll-out and economies bouncing back.
As well as this, the winning areas in 2021 are likely to be different to that
of 2020. The Technology enablers have performed very well in 2020 and
brought forward future earnings growth – whereas the benefiters from
economies reopening are likely to be smaller sized businesses and travel
related stocks.
The UK has been unloved since the referendum result – we do not just
invest in the UK, but our “home” market looks well set to benefit from a
recovery in economic growth. Also a key hurdle to overseas investors in the
form of Brexit is resolved following the trade agreement with the EU at the
end of 2020.
It is difficult to see bonds losing value against a backdrop of highly
accommodative central bank policy but it is also difficult to see how
returns can be generated with the low yields already on offer – we
therefore need to look for other asset classes to protect portfolios and to
be diversified.
Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.The Luna Team
Our team of investment management professionals has over 150 years’ combined experience, having managed
more than £1bn of client investments. Each member of the team has been specifically recruited to deliver the high
level of personal service and bespoke investment solutions that Luna believes clients deserve.
James Carter Ed Maxwell
Investment Director Investment Director
James is one of the Founders of Luna and is the lead Ed is an Investment Director at Luna, part of the
Investment Director, with responsibility for devising executive management team and a member of the
and delivering the Luna investment management Investment Committee.
proposition.
Alex Brandreth Barrie Charnley
Chief Investment Officer Senior Investment Manager
Alex is responsible for coordinating the overall Barrie joined Luna as a Senior Investment Manager
investment strategy at Luna. He is also the lead in June 2020. He works closely alongside the
Fund Manager on the Luna Model Portfolio Service. Investment Directors to ensure bespoke solutions are
delivered within the wider investment framework.
The Luna Way
Luna is a specialist investment management firm. We exist to nurture the future for our clients and their families
by providing tailored, risk-based investment management solutions to help them achieve their long-term financial
goals. Luna symbolises new beginnings and the opportunity for positive change and transformation.
Luna offer a truly bespoke service with expert communication and comprehensive administration, underpinned by
award-winning technology.
Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority.Managing Your Wealth Day and Night Luna Investment Management Level 7, Tower 12 The Avenue North 18-22 Bridge Street Spinningfields M3 3BZ 0161 518 3500 enquiries@lunaim.com Lunaim.com The content in this publication is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results. Luna Investment Management Limited is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority. Luna Investment Management is registered in England. No 12280396.
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