The Grab for Yield
- The stratification between the real economy and the stock market continued this week as the Dow Jones Industrial Average, an index of thirty large US companies, reached a record high of 30,000 points. Donald Trump was quick to laud the stock market’s performance as being the result of his economic genius, a welcome break from claiming election fraud, no doubt.
- UK Chancellor Rishi Sunak unveiled his 2020 spending review for the next financial year. Support was provided asymmetrically through public services with the NHS, and NHS workers, being some of the few winners in a budget that saw 1.3 million public sector workers receive a pay freeze.
- This week, the media has turned its eyes toward Joe Biden’s pick for Treasury Secretary: Janet Yellen. Ms Yellen, a former head of the Federal Reserve and a respected academic, is welcome respite for investors who might have feared the appointment of leftist candidates such as Elizabeth Warren. Ms Yellen’s history of raising interest rates has won her praise on Wall Street.
Despite some moderation towards the end of the week, markets have once again risen across the board, continuing the endemic trend. As valuations push to new highs, equities remain an expensive asset class and easy wins are all but non-existent given where valuations are relative to near-term business prospects.
Equally in fixed income, yields have compressed significantly; some high yield bonds which previously yielded 5% to maturity are now sitting at depressed levels of 3%. The last few weeks have heralded a gradual realisation from market participants that historically low government bond yields are a significant headwind for return potential in the asset class.
In an attempt to rotate the fixed income components of portfolios, investors seem to have undertaken a mindless grab for yield. This dynamic has been a key return driver for our portfolios over recent weeks as investors have come round to our way of thinking. Return potential in corporate debt remains significantly ahead of government bonds, ensuring that they continue to earn their way into portfolios.
In this environment of prices being driven by short-term sentiment and speculation, we are ensuring that we adhere to our investment philosophy and do not get caught up in the cacophony of noise. Our long-term time frame is at the heart of our decision making. We will invest selectively in assets which our analysis suggests will provide returns over the long-term, rather than chasing the news flow by participating in whatever happens to be the fashionable trade of the week.
Quote of the Week
On Wednesday Donald Trump pardoned a lucky turkey called Cob, sparing the bird the fate which awaits many turkeys in America this time of year. Thanksgiving means November is a bad time to be a turkey in America, as it also looks to be for Trump’s effort to call a halt to Biden’s ascension to the US presidency in January. At Sanlam we are not opposed to an aide-mémoire, but we cannot help but feel that the time might now be ripe for Mr Trump to wave the white flag. We hope to see the day he brokers his much-publicised peace deal between North and South Korea whilst muttering ‘Never Eat Shredded Wheat’ under his breath. In any case, it looks like his presidency is for the birds.