Prudential Market Insights | October 2020

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  • 09 mins 55 secs
Phil Butler, Multi-Asset Portfolio Manager, M&G Treasury and Investment Office discusses the impact of Covid-19 on markets, The FTSE vs the S&P500 and the importance of the US election on global markets.


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for the latest update from the Prudential Portfolio Management Group. I'm joined by multi asset portfolio manager Phil Butler from the Energy, Prudential Treasury and investment office fill. It's good to have you with us today. Hi, Jenny. So let's start with the ongoing covert crisis and has this altered your short term view on markets? It all. It's definitely raised our level of uncertainty. I think if the risk positions we had one we had between April and June, Er's generally global markets recovered from the shock of the cove. It outbreak. Think as times got on with it and had the second wave occurring over the summer. And we have dearest on the basis now I think when we try and put it into perspective, death rates are lower. Whilst we see the number of cases rising down day, the number of deaths are are lower than they were at the very beginning off the issue. They generally we trying to split them up into three different camps. If you wish around how they're dealing with the crisis, the sort of life for us and in Brazil where they're just carried on as normal, no real change in terms of how they're they're just continue with an open economy. You got places in Europe like UK Frantz. They're seeing an increased second wave and there's all very much countered this with some additional knockdowns, but definitely not the widespread lockdowns that we had like in March and April 3rd camp is around the sort of foot on second lockdowns, as we've seen in Australia or South Korean parts of China. And you know, it's very much a array of different of concept. You could go with them on how to deal with the issue. I think that what that brings with it is uncertainty for investors on how the outlook is gonna be. And I think for us that this scale of that uncertainty is definitely having an impact. And we saw a little bit of Iranian bonds, most recently off that concern. I think like that short term definitely impacting us. What we're trying to is just trying to get engages Thio how different economy's gonna be reacting on our markets. The footsie 100 trails, the S and P 500 by considerable margins. Really, in 2020 what do you think of the reasons behind this and you see any value in U. K. Equities? Yeah, that's a really good question. And I think that if you look at the fax, I mean, you've got sort of the 3100 ft you'll share down maybe 20% to make in September on. But if you look at the U. S, the S and P s down a story up about 3% NASDAQ's up about 15. And some of that is down to towards the makeup off those industries. So UK center industries are very much no oil and gas and energy with it, which is obviously being hurt. This year, based on the global slowdown on the Converse articles in the U. S. Is very big in that tech side, and tech has, you know, we're all working from home. We're doing this virtually Jenny on people in a scene there as a fast forwarding off a future Trent. And then finally, the UK has that sort of banks. Financials angle when again, you know, there's lots of people who are, you know, possibly struggling. And there's concerns for growth in the coming years, not just this year when we look opportunities which is your question. You know, you look at the UK it's on a price to book a 1.35 dividend yield of 4% of the P of 18. If you compare like the US, it's PBS over three. Its dividend yield is blowed three and its peers up there at 26. So do we see options? Yes, I think he needs to be cautious on stepping into some of those opportunities. But, you know, we could very much easily see a situation where the UK banks stopped paying the dividends again because they've got some more comfort uncertainty on the economy and that the U K one in particular remaining open. I do think a little bit with the UK sector at the moment, and a general feeling of market participants is three overhang of Brexit. I do think that's playing a part of the moment. Well, it remains a difficult environment for commercial property, so the valuation and certainty clause is still in place for property funds. So on the ninth of September, the RICS Institute had a general removal off those uncertainly clauses, but remained them in place. The first leisure Onda hospitality, where they're being most affected by the coronavirus outbreak. Now what that done is allowed a lot of UK probably funds start opening. Those really probably funds tend to be the ones that were more heavily focused on industrials on tech warehouses. They may have had a better liquidity position. Cash may have had a larger mental roots in certain situations, and some funds are being invested in what we would call alternatives. So this could be residential. We've all seen the effects of the residential market influence. Necks, um, increase in the stamp duty allowance now so someone said, because some funds are starting to open, but there's obviously not a lack of headwinds. I mentioned Brexit a couple of times, and that's definitely not causing some participants to to stand the sidelines over the summer as well. There has been some discussions around trying to see if you can change, adapt the way UK property funds organized instruction to protect investors. I think that that may affect the short term desire of some both retail and institutional investors to be retained in the market s O. That might put some additional downward pressure. E think our general feeling with supporters to the UK property, the fools we've seen this year of being very much in line with our expectations. That's not to say there won't be additional headwinds, but in a rental, incomes remained. Hi, 18 90% of anyone the fund that you're looking at. So it remained healthy. And I think going forward where bond yields being solo bank rates near zero, if not negative in European countries, I do think that the property yield that you're getting, even if it may be lower than what we've seen privileges is going to be beneficial to our multi asset portfolios on the U. S. Presidential elections. Do you see those as important to global markets? Without a doubt, I mean, U S economy is the largest, one of the most important, if not the most important economy globally. It has an impact on how markets gyrate, and that's gonna be important. Now we're less than 30 days a month away now from the U. S. Elections on if you look at the latest prediction, polls betting Spritle, that sort of thing, they're seeming to indicate a clean sweep for the Democrats. That's, you know, clean sweep in terms of the house, the Senate and the presidency. So you can you can be a mess of thinking that, you know, that that shouldn't therefore be uncertain. And that should it should be a clear gone conclusion because you just reminded for all our lessons that there was. This is based on of the electoral vote, not the popular vote. You know, you will remember that Trump won the electoral vote last time and hit you on the popular vote. So there and ask is where your uncertainty begins because you know you're not going to parlay sure who will win, even though that the polls are indicating that the Biden is a firm on favor at this current state. Clearly clean things can change very quickly, as we saw with Trump's diagnosis of coronavirus. Um, most recently So what does that mean to market? Because ultimately everything has to feed through effect. So when we look at how this is impacting, if we go with a democratic clean sweep than what we're likely to see is, you know, increased spending, increased taxes and when we look at that, how that how that plays through with therefore expect, that's having slightly more increased confidence in the economy because of the increased spending on the fiscal side, we'd expect markets equity markets to be a bit mixed. There'll be increased taxes, increased focus on something like Tech, which has been a big play this year. However, that broader confidence should be beneficial in the bond yields space. We would expect rates to go up there is that increase confidence. Now we've seen this with previous elections. That doesn't always play out. So, you know, we're very much a house that we don't take views on such a Barney outcome, especially when we have definitely no insight compared to the many other people many people out there. So we're sitting tight looking and seeing where we think there are opportunities, very much focusing on how we think this will play out. Well, finally, considering all we've discussed, how you position going into the fourth quarter? Yeah, I mentioned earlier, So we've been neutral equities since the beginning of summer. I think it's the right move, given sort of volatility that we've seen and then fall back in markets. We removed our global high yield position we had on the portfolios in September we saw the increased second wave risks of coronaviruses as warrant enough to take that often and to re evaluate the risk position in the portfolios in the risk most active and passive funds that we run in our team. We do still have a small reposition the UK reach position on there. We do believe that the Donovan and price valuation differences in the UK commercial sector still remain attractive both in the short term but also the medium term. I think we step back now. Your question earlier around UK U. S equities I think people are seeing the pullback in markets as a possible opportunity on. We are closely looking at that and whether not now is the right time to be adding risk, cause we're going to queue for with, as you mentioned Brexit US elections and, you know, forecasting for what we think will happen in 2021. Phil. Thank you. Thank you very much. We'll do keep a night out for other monthly updates on multi asset investing here on asset TV. Thanks watching and bye for now