Spring Bounce

Spring is a time of renewal and recovery. With vaccination programmes well underway and the outlook for the economy improving, we at The Scottish have been paying particular attention to 'reopening' stocks - those poised to benefit from a return to economic normality. A spring clean of our portfolio included many such investments.

One year ago, the economic damage from the unfolding coronavirus pandemic appeared unquantifiable. It was unclear when, or indeed if, a vaccine would be available. Shares of companies most reliant on a buoyant economy were, rightly, marked down.

Of course, vaccines have now transformed the prospects of a recovery, but with valuations for many stocks still not reflecting the improving outlook, we believe that many investors are underestimating the potential rebound.

As pent-up demand is released, many of the companies that will see the greatest benefit are those that have been most overlooked in recent years.

Exceptional measures

The vaccine is not the only salve that has bolstered the economic outlook. Massive stimulus programmes from central banks and governments have ensured that consumers and businesses emerge from the crisis in a more robust state than in previous downturns. This should accelerate the rate of recovery.

Stimulus has other side effects worth keeping an eye on. Signs of recovery are starting to drive bond yields higher - albeit from a very low base. This matters as higher bond yields reduce the value of profits that will come at some point in the future. In other words, higher yields favour companies that can make profits now. Thus 'value' investments have outshone their 'growth' counterparts.

Unexpected winners

Many 'value' sectors face structural changes that obscure the winners within them. Retail is a prime example. The high street's struggles have been well documented, but the shakeout of weaker competitors ensures survivors with attractive brands and strong digital strategies gain market share.

Likewise, companies that are quietly working to improve their prospects have also been masked by the economic turmoil.

To take advantage of such opportunities, we have added stocks such as H&M, Capri Holdings, Cheesecake Factory, Six Flags Entertainment and Whitbread, which are well placed to benefit when people start spending.

We also see compelling opportunities in the financial sector. Banks are direct beneficiaries of rising yields and improving credit trends. Our additions in the sector include Wells Fargo, First Horizon, Santander and HSBC. Meanwhile, in the often-overlooked life insurance industry, we favour the restructuring underway at both Aegon and Aviva.

Another opportunity lies in unloved cyclical stocks sensitive to economic activity. Here, we have increased exposure to energy stocks, such as Halliburton and Helmerich & Payne, as well as industrials like General Electric.

The value of gold

The other side of the recovery is the return of inflation. The extraordinary fiscal and monetary interventions we've seen worldwide will, inevitably, have consequences. Many people assume that central banks will intervene to stop inflation, but that assumption looks misplaced. Already, the US Federal Reserve has indicated that it is willing to maintain its exceptionally accommodative stance and to tolerate higher levels of inflation. And after all the borrowing they have done during the pandemic, governments need some inflation to whittle down their debt piles.

We think many investors are still underestimating the combined inflationary effect of massive stimulus and a population eager to start getting out and spending again. And once the inflationary genie is out of the bottle, it will prove difficult to control.

That's why gold remains central to our strategy. Unlike fiat currency, gold holds its value in the face of inflation. So gold miners should respond well to the re-emergence of inflation. We see them as beneficiaries of the post-pandemic environment rather than defensive investments. Our holdings include some of the world's leading gold miners, including Newmont and Barrick Gold.

Spring forward

Our recent additions have fundamental opportunities to improve their prospects as well as the potential to capitalise on the environment that we see ahead. Many of these are in areas that were already unloved and depressed - as contrarians, that's why we've got a spring in our step as the weather turns warmer.

26 March 2021

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments.

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