Wayfarer Q3 Commentary: October 2020

Macro Overview

Business wants to come back. When will the virus let business unleash its pent-up potential and what (ongoing) helping hand will governments provide to ensure consumers and companies have the wherewithal to facilitate economic recovery? These were the big questions in the quarter as most companies and consumers enjoyed a brisk comeback from the carnage of Q2 (the recovery started in May in some instances). For a change it was manufacturing and construction that took the lead but services saw some rebound too.

The charts below depict some of the highlights (and occasional lowlights).

Chart 1. Services demand in China has almost normalised

Source; JPM AM, National Bureau of Statistics of China, EMED, MS, Company data. As of Aug 2020

Chart 2. Developed Market Composite Purchasing Managers’ Index (PMIs)

Source; Capital Economics

Chart 3. Property and infrastructure are cooling as consumption recovers

Source; CEIC, Gavekal Dragonomics/Macrobond

Chart 4. Inventories at their lowest levels since 2014 – should lead to a strong re-stocking benefit for the economy in 2021

Source; St. Louis Fed, Raymond James research

With restrictions ramping up across Europe and the UK it is likely the recovery will moderate somewhat from here in these regions until investors can assess the economic impact of the recent increase in Covid cases and resultant government actions.

It will also moderate to a lesser extent in the US as consumer incomes have begun to fall as the incredibly generous temporary unemployment benefits have been replaced by less egregiously generous payments. Another fiscal boost is likely post-election but we will need to see which political flavour it turns out to be.

The chart below shows the latest bookmakers’ odds in the US elections.

Chart 5. Trump vs Biden implied probability of winning the US election from betting odds

Source;PredictIt.org, JP Morgan

The bullet points below from Gavekal Research highlight what might change if the polls are indeed accurate and Biden is elected;

  • The Trump tax cuts will be replaced by tax increases.
  • Deregulation will be replaced by re-regulation, favouring big companies and hurting small ones.
  • Protectionism will probably continue, but against a different basket of goods and services.
  • Rates could hardly go lower and may rise if inflation picks up.
  • Diplomatic threats will disappear, except perhaps against Russia.
  • Subsidies will continue, and in some areas may increase.
  • Some antitrust actions may be initiated against dominant companies, but this will be tempered by most of them having supported the Democrats.

In the meantime, the US has kept up pressure on Chinese technology companies without going to the most extreme measures touted. However, such moves have more negative than positive implications for industry players across the globe.

In most parts of the world inventories are low, indeed at levels which have historically preceded booms, so this provides further ballast to the global economy.


Given what went on in the prior two quarters the relative calm during Q3 was a welcome respite. Despite this, there was, as ever, a lot going on beneath the surface. What can be assessed from corporate announcements and actions is that the vast majority of publicly quoted companies across the globe took immediate action as and when the virus hit their region or sector. As such the worst of analyst expectations were seldom reached and indeed much of the world is now seeing earnings upgrades thus providing some support for what look like full equity valuations.

Figure 1. Percentage change in markets and currencies during Q3

Whilst we are not particularly exposed to Western Banks there are a couple of developments there that bear watching. The first is that, at long last, a much-needed further round of consolidation is beginning in Europe, centred on Spain at the moment but with murmurings also occurring in Germany, Switzerland and France. Two deals have already been announced in Spain and a more full-blown consolidation would result in better capitalised and more efficient behemoths emerging, thus facilitating better returns in a sector that has been more or less under constant siege since late 2007. It is something we need to be aware of. In a similar vein UK banks have been increasing (yes increasing) rates on many mortgage products in an attempt to boost margins and build capital should the housing recovery falter in the New Year. When one combines such actions with the aggressive building up of provisions before all the bad debts hit (hitherto UK banks have waited until the bad debts were actually upon them) then we have a combination of incredibly cheap shares compared to history on the one hand whilst on the other hand, the banks are much better capitalised than they have been, particularly compared with the crises of 2008-09. Something has to give and we are doing a lot more work in this area.

UK equities have again lagged as PM Johnson signed off Q2 by saying he would be happy with an Australian type of arrangement with the EU. Investors clearly did not share his enthusiasm although the pound showed remarkable resilience over the period, helped by general dollar weakness. UK companies have mostly shown resilient results amidst the firmer general tone referred to above.

The strength of the recovery, hopes of further global stimuli and optimism over a vaccine being approved sometime between November at the extremely optimistic end and April at the merely optimistic end, combined to push bond yields significantly higher. This was despite the second surge in cases across Europe and attendant curtailments in social interaction and hence economic activity.

Gold put in a decent advance over the quarter although all the work was done in the first half of the period with half the advance retraced in the latter period. Copper hit a two year high in the quarter on China growth, a recovery in automobile production and confidence in its role in the ramp up of electric vehicles.

Oil ended the quarter up only marginally as it was viewed as the whipping boy for extra travel restrictions. The commodity had been 10% higher before new restrictions kicked in. Adherence to supply curtailments has been high and inventory drawdowns have been unseasonably elevated (albeit from very high inventory levels).

Energy shares are even more unloved than banks, partly on ESG (Environmental, Social and Governance) mania. However, the supply demand balance is in good shape and many oil companies have taken significant steps to move long term towards a lower carbon world. For at least the next ten years the world cannot operate without oil and gas so there will be very good money to be made from here as the world moves on from Covid.

Activity & Positioning

Activity was very light in the quarter, the only trade being selling the very highly valued NASDAQ 100 Trust we were able to buy during the market meltdown in March. There are several areas we will add to in coming months but in the face of another (increasingly ephemeral) Brexit deadline and (hopefully binding) US Election we chose to retain some firepower, especially as August – October can often throw up a few wobblies for investors.

I am as confident now as I was in the early stages that mankind will cope with Covid and that, as has been shown in the summer, activity will return as soon as it is deemed safe to do so. What I am not 100% sure of is whether this will occur solely because a miracle vaccine appears. We have been able to cope with various other ailments via therapeutic therapies, herd immunity or simply better track and trace (SARS in Asia), or a combination of the three ways mentioned.

Given the combination of the much talked about monetary and fiscal stimulus, taken alongside the significant build up in savings amongst many households (see chart below) there is a good probability that many are underestimating the pent-up demand that will be unleashed when optimism rises from the current low levels. Indeed, as the other chart below indicates, UK Consumer Confidence has detached from its historic relationship with what actual economic data is saying.

Chart 7. US household net saving has spiked significantly since the onset of the crisis

Source; JP Morgan Guide to the Markets

Chart 8. Consumer confidence is lower than Capital Economics’ model suggests it should be

Source; Capital Economics

Furthermore, Bank of England Economist Andrew Haldane has warned of the harm excessive pessimism could cause in the UK, “My concern at present is that good news about the economy is being crowded out by fear about the future.” He also said, “it has emphasised recession and risk over resilience and recovery. It has resulted in good economic news, of which there has been plenty, being discounted too readily and fearfulness about the future being accentuated”.

Figure 2.  Portfolio changes in Q3 – RJIS


In conclusion, short term markets are in the hands of politicians – be it the final throws of Brexit, the US Presidential Election and/or how they handle Covid. However, the resolve to reboot the global economy as soon as is possible cannot be questioned given the efforts thus far. The public corporate sector has also taken great strides to shore up its liquidity position in the face of the most dramatic (government mandated) revenue shortfalls most companies have ever experienced in such a short space of time. So next year and beyond we will see a better capitalised corporate sector benefit from easy comparisons (excluding companies who had a one off Covid boost) and an economy recovering across the globe. This should lead to decent returns which will be further boosted by dividend growth well in excess of inflation. The exact amount of gains will be determined by how well the virus is contained in the coming quarters.

It is very likely 2020 will go down as a generational nadir for income investing, especially in the UK. Our portfolios stand to benefit greatly when investors once again return to viewing the long-term dividend potential of companies instead of worrying about the next three to six months. Earnings recovery, robust dividend increases and recovery from incredibly low valuations will all combine to drive these returns.

Current Asset Allocation

Important Information/Risk Factors:

Past performance is not a guide to future performance and investment markets and conditions can change rapidly.  Investments in equity markets will be more volatile than an investment in cash or fixed deposits.  The value of your investment may go down as well as up.  There is no guarantee you will get back the amount invested.  If your fund invests in overseas markets, currents movements may affect both the income received and the capital value of your investment.  If it invests in the shares of small companies, in emerging markets, or in a single country or sector, it may be less liquid and more volatile than a broadly diversified fund investing in developed equity markets.

The views expressed herein should not be relied upon when making investment decisions.  The article is not intended as individual advice and if you require advice or further information you should contact us.