Monthly Commentary – December 2020

Stockmarkets rose in December, capping a year of solid returns for global equities. 2020’s gains were volatile, however, and unevenly spread. December’s rise came as investors took solace from the deployment of Covid-19 vaccines, new stimulus packages and a Brexit trade deal. Those events were weighed against some worrying developments in the pandemic as a new coronavirus variant emerged.

Alongside increasingly grim infection and mortality figures, the emergence of the faster spreading variant prompted renewed travel restrictions and a tightening of lockdown measures. Ultimately, however, investors focused on the brightening outlook, with further positive milestones reached in the fight against the virus. Significantly, vaccines gained emergency approval from regulators, allowing mass vaccination programmes to begin. This paves the way for a reopening of the economy and provides an opportunity for economically sensitive stocks to recover.

There were signs that the rollout may not be a straightforward process, as Pfizer, one of the vaccine producers, highlighted that it had encountered challenges with its supply chain.

Despite the positive vaccine developments, the economy remains severely constrained. News of further stimulus was therefore very welcome.

After protracted political negotiations, the US approved fiscal support worth $900bn. Stimulus packages were also agreed in Europe. The EU passed a budget that included €750bn of pandemic support after Hungary and Poland dropped their earlier objections. Meanwhile, the European Central Bank expanded its bond buying programme to inject more liquidity into the economy. Although the EU-UK trade talks went down to the wire, an accord was eventually reached, averting a ‘no-deal’ Brexit.

Sector performance reflected the improving outlook for economically sensitive stocks. Materials and financials were strong, as was information technology. The weakest sectors were real estate and utilities, which were held back by rising bond yields in the wake of increased stimulus.

Latin America was the strongest region in December. Asia was also robust despite new orders from the outgoing US president that required some investors to dispose of investments deemed to have connections to the Chinese military. The weakest region was North America, although it still delivered positive returns for the month.

One of our best performing stocks in December was Capri. This is a fashion house and retailer with three brands: Michael Kors, Versace and Jimmy Choo. Sales have been adversely affected by the pandemic and slowing growth for Michael Kors. However, a reopening of the economy and plans to restore Michael Kors’ premium position underpin the company’s strong prospects. There is also hidden value in the recently acquired Versace and Jimmy Choo brands, which can drive sales growth and cash generation. The company is targeting rapid store expansion for both of these brands, aiming to double revenues from each over the next few years. We bought the stock at a valuation that was considerably below historic levels.

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.

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. This may mean you get back nothing at all.