Advertising Feature What Does The Road To Recovery Look Like For Investors? Ninety-Ones Clyde Rossouw and Abrie Pretorius, managers of the St. Jamess Place Worldwide Income Fund and co-managers of the St. Jamess Place Global Quality Fund, discuss the risks and opportunities available across the current global investment landscape. Following an extremely challenging year, how do you view the market outlook for 2021 and beyond? Clyde Rossouw: I would start by highlighting the growing disconnect between where markets have got to and where we are economically. Stock markets appear to be looking ahead to the next cycle and trying to anticipate what the post-COVID world will look like. Many regional economies, however, are still struggling to find the road to recovery. This is something we need to be aware of as investors and it lends itself to a degree of caution in our view of the near future. We are optimistic that the economic normalisation process will continue from here, with a lot of activities returning to something that resembles what we were used to prior to 2020. But, broadly speaking, global stock markets are already back at rather extended levels. Central banks continue to keep the liquidity taps wide open, and free money is still very much around. However, I feel a little bit more nervous now than I did this time last year. Twelve months ago, the environment was tough, but asset prices were low. Now, the environment is still tough, but asset prices are high. It therefore seems sensible to approach markets with a bit more caution. Are there any attractive opportunities left in stock markets? Abrie Pretorius: Yes, there are pockets of opportunity, but it is as important as ever to be selective. I believe the portfolios are strategically advantaged and very appropriate for this environment, but they are currently trading at one of the biggest discounts to the market that Ive seen in almost fourteen years of running this strategy. Given the attractive financial characteristics that we are looking to invest in, and the robust performance that we expect these businesses to deliver, our portfolios would usually warrant a valuation premium to the market. This makes us quite excited about the outlook right now. Across the market more broadly, there are clear risks in terms of valuation and the pace at which economies are now expected to reopen. I think its going to be far harder to actually reopen our economies than it is to talk about reopening them. Fortunately, not all businesses are dependent on re-opening, and therein lies an opportunity. Did the volatility of 2020 lead to more portfolio activity? Clyde: Its fair to say weve probably seen a full market cycle over the last twelve months, which is unusual because normally such a cycle would take five-to-seven years to complete, sometimes more. We came into the crisis with a fair amount of cash within portfolios and weve gradually put this to work, taking advantage of fantastic opportunities that we felt we could not ignore. Overall, however, there was already a sensible balance within portfolios, which has meant that we havent needed to make wholesale changes to reposition the portfolios to remain relevant in the COVID and post-COVID world. The portfolios were already in good shape for the environment. How do you explain the continued outperformance of US technology stocks, such as the so-called FAANGs? Clyde: I think this is linked to the increasing influence of passive investment strategies [which aim replicate the holdings and performance characteristics of an entire stock market index, rather than actively taking selective positions in particular companies]. There is no doubt in my mind that the combination of free money and a growing desire among consumers to pay less for a commoditised financial product, has driven strong growth in passive investing relative to active management. There are a lot of arguments in favour of passive investing, but I would argue that the growth of these strategies ultimately makes the opportunities for active managers even larger. The growing influence of passive means that a lot of shares trade without recognition of price seeking behaviour. In other words, who is actually deciding that a company like Facebook is worth $300 per share? That collective decision is not always completely driven by an argument about the intrinsic value of a company. The biggest problem with passive strategies is that they buy assets simply because they have money to invest. To our minds, that is not always the most intelligent way to invest. By definition, the growth of passive investment has meant momentum investing has become quite fashionable. Continued... Set course for Jamie Lewington & Company Ltd is an Appointed Representative of and represents only St. Jamess Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the groups wealth management products and services, more details of which are set out on the groups website www.sjp.co.uk/products. Jamie Lewington & Company LTD