Page 18 - DIY Investor Magazine - Issue 28

BRUNNER INVESTMENT TRUST PLC A DIFFERENT APPROACH In the latest instalment of the Connected Investor podcast Portfolio Manager Matthew Tillett considers recent comments about US interest rates which shook bond and equity markets, the impact of the rollout of vaccines in many developed markets, and how it is turning investors away from growth stocks to look at other types of investments. Joe Lynam: Matthew, how have markets been since we last did this in mid-November? Matthew Tillett: Much has changed Joe; markets then were driven by those benefiting from lockdowns, particularly technology companies. The shift since then has been driven in the main by the vaccine – the positive results from the trials, and then from the rollout; also we have still got a very supportive policy environment, and fiscal policy. Then there is the prospect of economies opening up and the pent-up demand from those less affected by Covid that have more money than they had a year ago; commodity prices rallied hard, inflation expectations rose, bond yields recovered and value outperformed growth. JL: 10-year US government bonds were at 0.8% in November, now they’ve doubled to 1.6%; what is going on? MT: They were very low before, but the market expects a much stronger economy, and potentially higher inflation; bond yields respond to demand as well as looking ahead to a tapering of monetary support and potentially higher interest rates. JL: What have people invested in over the last three months, and what are they getting out of? MT: Put simply, it’s a reverse of what we saw at the start of the pandemic when initially everything fell followed by a strong rebound amongst sectors like technology, but not cyclical sectors like commodities, oil and gas, travel and leisure; these are the areas that are recovering now. JL: Thoughts on Bitcoin Matthew? MT: Even if I wanted to consider Bitcoin – which I don’t – it’s not what the Brunner Investment philosophy is about. JL: With money piling into Bitcoin, Tesla and Gamestop, have some investors been illogical? MT: The question is, are we in a stock market bubble? One viewpoint is that there is a bubble when valuations are elevated because people are buying stocks just because others are. Alternatively, a behavioural approach asks are people doing crazy speculative things that don’t make any sense, and there are some worrying signs, but it’s quite isolated to a number of- JL: Reddit fans. MT: Exactly, we don’t really see it. The US looks elevated but it has a lot of highly valued tech stocks, so it doesn’t look to be like a bubble to me at this stage. JL: Now that Joe Biden has command of the senate, the house and the oval office, will his $1.9 trillion stimulus package have a major impact on the global economy and is there a downside of a lot of money chasing limited resources and inflation? MT: It’s clearly a huge amount of money and a much bigger stimulus than was applied after the financial crisis which was arguably a much deeper and more long-lasting downturn; it looks like we may be coming out quite quickly, so it has the potential to stimulate significant GDP growth and a rapid recovery. However, there are still longer-term structural issues facing Western economies: over-indebtedness, which existed pre- Covid has got worse, putting downward pressure on economic growth and the demographics in general are not particularly favourable either JL: Certainly in bits of Europe and in Japan. MT: Yes, the US to be fair is actually relatively better; I’m seeing it as a shorter-term impact that will benefit more cyclical areas of the economy and the financial markets. JL: It’s not just the US, there’s going to be a massive stimulus in the EU, Japan and other major economies as well; China is probably the only place that doesn’t need stimulus as it’s aiming to grow by 7% this year. MT: Extraordinary amounts of money; after the financial crisis policy makers and academics feared bond markets wouldn’t accept such stimulus, and inflation would soar leading to financial chaos, but the last 10 years suggests that’s not the case, and there’s less focus on austerity. DIY Investor Magazine | Apr 2021 18