The World In A Week – LatAm Shenanigans
February was generally a positive month for equity markets, but last week turned out to be quite a bumpy ride, particularly in the US, and notably within the technology sector. Albeit from low levels, we have seen a pick-up in government bond yields, with the expectation that central bank policy decisions will ultimately lead to inflation. The market has extrapolated that this will need to be countered with interest rate rises. With valuations on many technology darlings having become stressed, the market is now beginning to worry that rates and inflation could damage future growth and start taking flight into other areas of the market.
Outside of technology, stay at home themes have clearly been massive beneficiaries of the pandemic since last March, but last week saw a reversal of their fortunes with Working from Home and Stay at Home themed stocks down -8.5% and -8% respectively (source: Morgan Stanley), while more cyclical parts of the market sat comfortably in positive territory. Are we starting to see the first signs of the market leaving behind COVID-19 winners? If we look at the macro backdrop this is looking fairly robust and supported by fiscal and monetary policy. With the move up in yields, could this potentially be supportive of a shift in market sentiment? Higher rates have always been a risk to contend with but only recently have come to the forefront of investors’ minds, as the speed of the move has been sharp and fast. Investor positioning towards technology and momentum remains high, so it is something to keep a close eye on. As ever, all focus will be on the Fed and the tone of language of how they propose to manage these choppy waters.
As investors, we look for good opportunities at the right price, trying to ascertain what might be the turning point for an asset class that has previously been unloved and out of favour. As an Investment Committee, we have recently increased our allocation to UK equities as the headwinds from Brexit seem to have been removed and appear to be well-positioned in terms of vaccinating against the COVID-19 virus and potentially returning to normal. An asset class that is cheap relative to history and its peers. Sometimes, however, an asset class can be cheap and remain cheap for a reason. If we look at Latin America and Brazil as an example, these are markets that are notoriously volatile and not for the faint- hearted, which has been illustrated again over the last few days. When Bolsonaro took over the Presidency in January 2019, this was viewed as very market-friendly, and the market reacted accordingly, but last week he ousted the CEO of Petrobras and put in charge the head of the military. Truckers have been protesting about the rising cost of fuel and, with elections coming up next year, Bolsonaro does not want anything to upset his chance of re-election. This move is designed to put a control on the company and the oil price. Unsurprisingly, the Petrobras share price took a nosedive. Whilst we do not have any material exposure to the region, it is relevant in the context that politics can play an unfortunately large part on sentiment and impact markets, as witnessed by the fallout of the Brexit vote of June 2016. Watching out for opportunities and threats will always be the name of the game.