The bad news for bearish investors will keep on coming, according to Jupiter’s Richard Buxton (pictured), who says the insatiable appetite for fiscal easing means the performance of the market will continue to diverge from the poor economic fundamentals.
This year represented the third major recession and sixth market collapse of Buxton’s career. Yet although the manager of the Merian UK Alpha fund has seen it all before, he said what separates this crisis from all the others is the radical government response.
“The scale of the fiscal response is without precedent and, actually, it is part and parcel of the move into a policy environment that is totally different from that which I have worked through for 35 years,” he explained.
“We are moving away from the orthodoxy of government, where you should try to run relatively balanced budgets and let the central bank control the economy through monetary policy, to one where monetary policy is effectively bankrupt, it can't do anymore.
“Apparently it is now going to be perfectly acceptable to just borrow and spend, borrow and spend, as the appetite for austerity has evaporated.”
He added: “To the frustration of the bears, I think this liquidity provision is just going to continue to mean that the asset markets will be more well-bid than you might think the current economic fundamentals would justify.”
One of the positions Buxton has added to his fund in light of the UK government’s response to the pandemic has been housebuilder Taylor Wimpey, a position he previously held between 2010 and 2016. Housebuilders were among the best performing areas of the UK market in the 10 years to the start of 2020, with Taylor Wimpey up 650 per cent over this time.
Performance of stock 2010-2020
Source: FE Analytics
The stock was hammered by the economic lockdown, however, and is down nearly 40 per cent year to date. But while Buxton is fully aware of the potential impact of an extended recession on the housebuilding sector, he said the bull points outweigh the bear ones.
Performance of stock in 2020
Source: FE Analytics
“The government is going to be incredibly supportive of the housing market because it's so important to economic activity,” he continued. “Clearly, rates are on the floor and are not going anywhere anytime soon, and the government is also doing things like the cut to stamp duty.
“Interestingly, the level of demand for housing has remained incredibly resilient even through the lockdown. So although you will have to worry about a pick-up in unemployment impacting house purchases, it would seem at the moment that the supply/demand imbalance is still being very supportive of the housing market.”
Buxton noted there also appears to be a “crying demand” for massive amounts of infrastructure spend, particularly on the renewable-energy transition. In an era of low bond yields and interest rates, he said this puts the government in a “fabulous position” as it can throw money at the issue without having to worry about losing any votes. But while the consequence of this unfinanced spending is likely to be a hike in inflation, Buxton said this is not something investors will have to worry about for a number of years.
“There's no early sign of any pickup,” he continued. “We live in a world of abundance, where there are more commodities, more oil, more stuff at ever cheaper prices to develop. And solar costs have collapsed in the last decade – similarly with wind.
“Inflation coming back is a kind of three- to five-year-plus phenomenon. While all this money has been pumped into the system, it's an increase in the velocity of money in circulation that will tell you there is a risk that inflation is beginning to pick up. And at moment, there is no evidence for that.”
As a result, Buxton has not made any changes to his portfolio specifically to hedge against inflation. However, he noted his bank holdings should offer some protection against such an eventuality, pointing out they would benefit from higher levels of growth in credit and nominal GDP, even if “governments continue to provide a headwind to their profitability”.
Instead, the main portfolio activity he has undertaken this year has been to add to positions that were hardest hit, such as Whitbread, which owns brands including Premier Inn and Beefeater, and SSP Group, a caterer that operates in airports and railway stations.
Although he thinks the recovery for these companies will be long and hard, this is part of being “an incredibly long-term investor”.
“I fully accept that it's going to take two or three years to get occupancy and revenues back up, but the shares have been so weak and I fully supported both of the capital raisings to ensure that they can get through this and come out stronger,” he said.
“The five-week meltdown in mid-February through late March was incredibly rapid and severe, but I witnessed that before and the lesson is, just don't panic.
“Don't throw things out at silly levels that you'll regret later. Just be patient and think through the potential outcomes and scenarios.”
Data from FE Analytics shows Merian UK Alpha has made 99.75 per cent since Buxton took charge in December 2009, compared with 98.08 per cent from the IA UK All Companies sector and 87.27 per cent from the FTSE All Share.
Performance of fund vs sector and index under manager
Source: FE Analytics
The £960m fund has ongoing charges of 0.85 per cent.