Saxo Morningstar High Dividend EUR Q3 2020 commentary

Market overview

Important Perspective: Imagine waking up as an investor from the 1980s, 1990s or 2000s. How would you make sense of today’s dynamics? You would see debt levels at all-time highs, economic output at multi-decade lows, widespread job losses, a global pandemic halting most human interactions… yet global stock prices are at or near record highs. If you are left scratching your head, you’re not alone. 

A meaningful part of the narrative is attributable to record levels of committed stimulus. Let’s not forget that interest rates are sitting down at all-time lows for the foreseeable future (at least, that’s what market participants are expecting, with the Federal Reserve hinting that rates will remain low until 2023). 

The challenge, of course, is that investors are also required to climb a wall of worry. Here are just a few current investor concerns: U.S. election nerves, Brexit negotiations, the vaccine waiting game, inflation uncertainty, US/China tensions, political division, and the potential for a rise in corporate defaults. Offsetting this, some participants—including professional and retail investors—appear buoyed by vaccine progress and a growing expectation for a 2021 recovery.

Key Developments: Looking within equities, all is not equal. What we’ve witnessed lately—and Q3 saw an extension of this—is diversity of outcome, with “new world” growth demanding a curiously high premium while “established” businesses fall off the radar of investors (this is true across developed and emerging markets). Understanding this dispersion has become one of the biggest talking points among investors.

Ultimately, it is unpopular stocks that tend to outperform popular stocks in the long run, as validated in several academic studies. Therefore, while 2020 has so far proven to be an outlier in this sense, it is the contrarian investor that has the upper hand probabilistically. This popularity/unpopularity conundrum should not be understated in these extreme times.

Speaking of popularity, interest in ESG (environmental, social and governance) investing continues at pace. This has been undoubtedly supported by sector performance differences, with ESG-friendly sectors generally doing better than some of the “dirtier” industries such as energy (obviously not all of the energy sector is “dirty”, but the composition is an important factor here).

Portfolio performance

Performance is net of all fees

Top Performers

• Compass Minerals International Inc. share price went up 18.0% during the last quarter and according to Morningstar proprietary analysis, the stock trades at a 11% discount to fair value. 
  
  Compass Minerals is the largest food-service company globally, operating in more than 50 countries with annual sales of almost GBP 25 billion. Compass Group’s model stems from operating on-premises catering facilities, rather than centralised industrial kitchens. Food services is Compass' core focus and contributes close to 85% of revenue. In addition, the company provides support services to clients through activities including cleaning services, office services (for example, concierge services), grounds maintenance, and so on.
  
  
• Lazard Ltd Shs A share price went up 12.14% during the last quarter and according to Morningstar proprietary analysis, the stock trades at a 18% discount to fair value. Lazard Ltd operates as a financial advisory and asset management firm in North America, Europe, Asia, Australia, and Central and South America. Its Financial Advisory segment offers various financial advisory services regarding mergers and acquisitions and other strategic matters, capital advisory, restructurings, shareholder advisory, sovereign advisory, capital raising, and other strategic advisory matters.  The company's Asset Management segment offers a range of investment solutions and investment management services in equity and fixed income strategies; and alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries, and private clients. 
  
  
• Broadcom Inc share price went up 11.5% during the last quarter and according to Morningstar proprietary analysis, the stock trades at 14% premium over fair value. Broadcom--the combined entity of Broadcom and Avago--boasts a highly diverse product portfolio across an array of end markets. Avago focused primarily on radio frequency filters and amplifiers used in high-end smartphones, such as the Apple iPhone and Samsung Galaxy devices, in addition to an assortment of solutions for wired infrastructure, enterprise storage, and industrial end markets. Legacy Broadcom targeted networking semiconductors, such as switch and physical layer chips, broadband products (such as television set-top box processors), and connectivity chips that handle standards such as Wi-Fi and Bluetooth. The company has acquired Brocade, CA Technologies, and Symantec's enterprise security business to bolster its offerings in infrastructure software and security.

Worst Performers

• Intel Corp share price went down 16.6% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 14% discount to fair value. Intel is one of the world's largest chipmakers. It designs and manufactures microprocessors for the global personal computer and data center markets. It is also the prime proponent of Moore's law for advances in semiconductor manufacturing. While Intel's server processor business has benefited from the shift to the cloud, the firm has also been expanding into new adjacencies as the personal computer market has declined. These include areas such as the Internet of Things, memory, artificial intelligence, and automotive. Intel has been active on the merger and acquisitions front, recently acquiring Altera, Mobileye, Nervana, Movidius, and Habana Labs in order to assist its efforts in non-PC arenas.
  
  
  
• HSBC Holdings PLC share price went down 20.2% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 42% discount to fair value. London-based HSBC is one of the largest banks in the world with 40 million customers worldwide. It operates across 64 countries globally. Key regions include Asia, Europe, the Middle East and North Africa, and North America. The two largest markets for the bank are the United Kingdom and Hong Kong. The bank offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking.
  
  
• Magellan Midstream Partners LP share price went down 21.8% in the last quarter and according to Morningstar proprietary analysis, the stock trades at a 25% discount to fair value. Magellan Midstream Partners is a master limited partnership that operates pipelines and storage terminals in the Central and Eastern United States. Its assets transport, store, and distribute refined petroleum products and crude and earn a fee-based stream of cash flows. Assets include the country's longest petroleum pipeline network, terminal storage, and several crude oil pipelines. Refined products make about 55% of operating margin, with the balance split between crude pipelines and marine terminals.

Outlook

Looking for risk offsets, it is the typical safe-haven assets that investors are looking towards. Gold, despite all its faults, has taken a lion’s share of the headlines in this space. Yet, unsung heroes in times of stress—such as cash and longer-dated bonds—continue to play their role as defensive ballast. Remember that the pledges by central banks to keep rates low has provided some comfort for fixed-income investors, despite the low yields.

Turning to bond holdings, it has really been about balancing credit risk versus the extra return that you can achieve. This spread between riskier holdings (such as lower-quality corporate bonds) and safer exposure (such as government bonds, which tend to offset equity risk) saw a big spike in early 2020, but has narrowed once again, as corporate bankruptcies have remained low to date. Emerging-markets debt remains an area of interest given the high relative yields on offer.

Circling the investment landscape, we can’t forget the importance of currency, which is one of the first places investors express their geopolitical views. This space continues to be important from a risk management perspective, too, although a lot of negative news is still seemingly priced into riskier currencies. In fact, procyclical currencies (those that tend to do well in a growing economy) have improved more recently, perhaps acknowledging the extent by which investors sought safety.