After their small dip in January, global equity markets continued to climb higher in February. There is growing confidence that vaccines will end economic lockdowns and there will be a return to trend growth in many countries. Traditional value stocks, indebted stocks and smaller capitalisation companies performed particularly well. Some of this move is due to relief that economic conditions are expected to improve. Much of this move can be also be accounted for by changing expectations of monetary policy. A prolonged rise in inflation would force central banks to raise interest rates. The great inflation debate is on-going, and the truth is that no-one knows for sure what will happen. If there was one economic variable that the Ashburton Investment team would like to know for long term investment, it would be the inflation outlook. On the one hand with close to a quarter of all US dollars in existence created by the Federal Reserve in just the last year, some economists confidently predict inflation. On the other hand, some economists argue that both technological advancements and the massive reduction in money circulation have huge deflationary effects. As President Truman once reportedly said “Bring me the one-handed economist”. Only very few have predicted hyperinflation given that confidence in central banks appears to be solid.

While new COVID-19 variants threaten to come down the track, the light at the end of the pandemic tunnel is looking much closer for citizens of countries with advanced vaccination programs. Israel, the UAE and the UK lead the way on this front. Data from Israel and a recent publication from Public Health England indicates the massive reductions in COVID-19 cases and hospitalisations as a result of vaccine programs.

The best performers held during the month were Lloyds Bank (+20.4%), US Bancorp (+16.7%) and JP Morgan (+14.4%). February saw a steeping of the yield curve that is favourable for banks along with positive news about the speed of vaccines roll outs in the UK and USA. The position in Lloyds Bank, who reintroduced their dividend during the month, was increased.

The worst performers held during the month were Unilever (-9.3%), Merck (-5.8%) and BAT (-4.8%). Unilever disappointed investors on reported margins though maintained guidance.

The reliance on wonder-drug Keytruda may be beginning to be recognised as an issue for Merck. Merck is a quality company trading on a low multiple and offering a great yield.

Perhaps the market does not appreciate the biological nature of the Keytruda product which makes it unlikely that revenue declines rapidly in 2028, when the product comes off patent.

There are signs of market excess perhaps in part due to increased retail participation and gamification of investment. The portfolio has been tilted towards sectors of the market that should benefit from a cyclical upswing, while selecting stocks that we believe to be undervalued and provide an above market dividend yield.