This week’s update comes from Holly Warburton, who is in our discretionary investment management team in Guernsey.
You’d be forgiven for thinking that the only news last week was Harry and Meghan’s primetime interview with renowned US chat-show host, Oprah. But it wasn’t just Megxit hitting the headlines in what was strong week in markets for the UK – the 2021 Budget was announced after all!
Whilst Rishi Sunak started off with a stark reminder of the impact of the pandemic, highlighting that: 700,000 people were out of work, it’s been the largest economic decline in 300 years at 10% and we’ve hit the highest level of borrowing whilst not at war, surprisingly the overall reaction has been fairly balanced.
Most commentators concluded that the Budget actually provided more support in the shorter term than expected with many schemes extended into autumn, including the furlough scheme and cuts in VAT across various sectors such as hospitality; providing a much need lifeline for many, as restrictions continue, and a boost to overall economic recovery.
The flip side of this is perhaps the inevitable tax hikes now required to reduce the debt back to pre-pandemic levels. However, unlike what had been anticipated, the Government didn’t raise national insurance, income tax or VAT, solely freezing personal tax thresholds – that is for the next few years anyway.
What is set to increase is corporation tax, rising to 25% in April 2023, subject to the economic forecasts showing signs of recovery. The expectation from here is that having higher taxes sooner will reverse the support quickly and the public deficit can return back to pre-pandemic levels by 2025/26.
This has been seen as a glimmer of hope from a market perspective leading to a weekly return of +2% [1]. After what was deemed a confused and inconsistent initial reaction to Covid-19 itself in terms of lockdown and restrictions, the pathway out, both the vaccine programme and the Budget, appears to be steering the UK in the right direction.
We saw a further boost yesterday evening, as figures showed the UK had seen further drops in Covid-19 deaths, with the daily number below triple figures for the first time since October. And, the vaccine programme remains on track with over 34% of the population receiving at least one dose – progress which is only behind Israel and the UAE [2].
In the US this week, markets weren’t such a positive picture on the back of declines seen within the tech-sector (which equate to over a quarter of the market). This is consistent with the pattern we have seen over the last few weeks, as investors have rotated away from those higher-growth sectors, which drove market returns during 2020, into those previously left behind but likely to benefit from the economy re-opening, which many are hopeful is imminent.
From Ravenscroft’s perspective, this shorter-term rotation is something our discretionary investment management team has been keeping a close eye on. Our investors and regular readers will know that long-term irrefutable themes, such as technology, healthcare and consumption, dominate our portfolios (and will continue to do so).
However, an unforeseen consequence of our strategy has been a considerable outperformance of our themes within a lockdown scenario, we of course continued to brush our teeth and wash our hair (consumer staples), spent more time on laptops and video calls than ever before (technology) and were heavily reliant of the advancement and innovation in healthcare to navigate a path back to normality.
Whilst there is no doubt that these trends will continue post-lockdown, the relative outperformance of these areas of the market has meant that these sectors, particularly technology, are trading at premiums to the broader market. This is something that we are, and have been, aware of and we are taking steps, across all strategies, to balance the portfolios out in terms of valuation – trimming more expensive holdings and adding to those which look relatively more attractive.
[1] IShares 100 UK Equity, Total Return in GBP from 28/2/21 to 5/2/21. Collated 7/3/21 from FE fundinfo.
[2] https://ig.ft.com/coronavirus-vaccine-tracker/
