Equities

Stockmarkets had a strong 2020 and valuations are looking very high by historical standards. The very strong rally since March 2020 has clearly lost some of its momentum. This week there were a lot of headlines generated by Day Traders spectacularly pushing up prices in certain stocks in a stand-off with Hedge Funds who have short positions in the same stocks. Hedge Funds have reportedly made huge losses and are likely to have faced margin calls. There are fears that this will lead to them selling long positions they held and this is leading to weakness in stocks.

All this is distracting noise in the market and will eventually die down and will be forgotten. However, it does once again underline the speculative froth in the market and the sheer volume of capital which is essentially hot money which is traded by people who are not paying any attention to corporate fundamentals – this is a feature which should make investors even more cautious.

Meanwhile, back in the real world the US Corporate Quarterly Reporting Season is in full flow. In general, most large companies are beating expectations on both Revenues and Net Profits. However, with a few exceptions (Such as Netflix and GE) most stocks have not responded positively to the numbers. This reflects the lack of market momentum noted above and also that the current elevated prices are discounting high profit numbers – this means the markets could fall perhaps significantly – this only adds to our general market caution.

Given this scenario, our recommendation is to invest in top quality, profitable and highly cash generative companies. Our stable of recommended names continues to feature companies such as Microsoft, Apple, Facebook, Mastercard, Moodys,  S&P Global Inc, Visa, Trex, Idexx, Games workshop, Howden and so on. If the share prices of these and other similar companies should happen to fall – perhaps due to some market panic – we would be to happy to buy more as their long term potential for compounding remains unchanged.

Equity Linked Structured Products

If the hyperactive activity by day traders and others continues to prevail and the market trades lower, a welcome side effect of this could, at last, be much higher volatility.

We would welcome this as this would raise the level of coupons that could achieve on Equity-linked Structured Products. In this arena we continue focus to a large extent on Auto-callables on baskets of three stocks.

We tend to look only at good quality companies where we have done detailed analysis of the fundamentals. Our structures always carry guaranteed coupons, a maturity of 15 months or less and have a low strike of around 75% so that investors will not suffer capital losses for the first 25% of the declines of the worst performing of the stock.

These structures have been generating coupons of 8-10% for some time but with the likely rise in volatility to market dislocation this could rise to 10%-13% in the next few days. This will be an important opportunity to focus on as it will give the chance to lock into some attractive coupon.

Fixed-Income

The Global bond market continues to move on it is own impressive way supported by Central banks and ample liquidity. Yields and spreads in general remain very low by historical standards.

With the beginning of the new year, we saw a flood of new issues. In general, higher yielding, $USD lower rated bonds from the middle-east have out-performed higher rated and lower yielding bonds, with exception of EFG Bank’s AT1 issue.

Some of the bonds issue during the month are 3.5% National Commercial Bank Perpetual, NC 2025 (down 0.5), 5.80%Oman Electric Transmission 2031 (up 2 points), 5.5% EFG International Perpetual, NC 2027 (up 3.5 points), 3.35% Power Finance 2031 (up 0.5), 2.375% SK Hynix 2031 (up 0.75), 6.25% Oman 2031 (up 6 points), 1.625% Total Perp, NC 2027 (up 0.7).

Latest Update: Feb 02, 2021