Invesco Select Trust Plc – Global Equity Income Share Portfolio update

Key takeaways

In recent weeks there have been two significant events:

1. US election outcome.
2. Initial efficacy data from the Pfizer/BioNtech and Moderna Covid-19 vaccine trials.

Both events have impacted the market and their ramifications are likely to continue do so in the period ahead.

Our take on the news

A Biden victory was the over-whelming favourite in betting markets and indeed the stock market had priced in a Democratic sweep of the White House and Senate running into the election.

Although Biden has won the White House, the Senate appears likely to remain in Republican control; the Republican party outperformed expectations.

From a market perspective this is very good news - we get the positives of a Biden win but without the less market friendly initiatives such as penal tax increases (both corporate and personal), less aggressive healthcare reform and a more centrist, predictable presidential approach to international relations. 

Whilst the lack of a Senate majority significantly limits the new administration’s room for more radical tax and healthcare reform, we would still expect a post-Covid stimulus package of sorts as well as a roll back of many of the environmental deregulations that have occurred under President Trump.

We would expect rhetoric with respect to the regulation and potential break up of several large technology and ecommerce companies to be stepped up, although the shape and impact of any regulation on share prices is still too early to predict.

Vaccine data

Whilst we do not have the full data from the Pfizer/BioNtech vaccine trial the initial read is of course encouraging (the same applies to the Moderna trial which is being published as we write). 

We must await the full data but from a market perspective this news changes the probability of a return to normality sooner; we can debate what the new normal looks like and indeed how quickly that reversion takes place but this news suggests that a worst case is substantially less likely.

This news has had a substantial impact on companies which are more economically sensitive, or which have been negatively impacted by work from home/lockdown policies such as travel & leisure.

What it means for the portfolio?

It is hard to disaggregate exactly which piece of news has had which impact, but we would make the following points:

• No corporate tax increase is good news for our US holdings in aggregate along with many internationally listed companies which earn US$ revenue.
• Less aggressive healthcare reform is helpful for our healthcare holdings.
• The vaccine result has increased the probability that companies benefitting from re-opening begin to feel that impact in H1 2021 though most of the impact will likely be felt in H2 2021. The market is a forward-looking indicator and has begun to price this in; observing this re-pricing in action on 9 November was quite incredible. It was the most remarkable day we can remember in careers spanning over 20 years. 
• Interest rates have started to rise as growth expectations are revised upward. This has impacted valuations in the more expensive part of the market as the present value of the cashflows expected to be delivered in the future declines.   
• If the global economy recovers in 2021-22 and corporate earnings with it, we expect market returns will be more evenly distributed across a broader range of sectors and companies than was the case in 2020. Why pay a huge premium for stocks that have already performed well and look, in our view, extremely expensive by historic standards?

The combination of the election result and vaccine news has resulted in a significant rotation within the market.

Financials such as banks and insurance companies, industrials and select consumer discretionary stocks (particularly travel and leisure), which have been relatively weak performers in 2020 have begun to reflect a more optimistic outlook for next year.

In 2021 we believe the world will begin to move towards a more normal pattern of investment and consumption, which is not yet fully reflected in share prices.