Monthly Commentary – February 2021

Overall, global equity markets were little changed in February, but this outcome masked some significant moves. Falling Covid infection rates and the prospect of massive US stimulus led to increased optimism about an economic recovery and, consequently, enthusiasm for the stocks most sensitive to a reopening of the economy. Accordingly, ‘value’ stocks outpaced their ‘growth’ counterparts.

As the vaccine rollout was ramped up, the falling rates of infection allowed some governments, including that of the UK, to set out plans for a gradual removal of lockdowns. In the bond market, the closely watched US 10-year Treasury yield reached its highest level in over a year on the prospect of more normal interest rates, economic recovery and inflationary pressure.

The bond market movements were fuelled by the progress of President Biden’s $1.9 trillion relief package. The bill passed its first hurdle by gaining approval in the House of Representatives. We believe that many investors have not fully appreciated the inflationary impact of massive stimulus programmes. Higher bond yields have negative implications for ‘growth’ stocks as they diminish the value of potential future earnings.

The month’s strongest sector was energy, which delivered double-digit returns. The oil price surged by 18% on optimism about an economic recovery and continued supply restraint. Financials were also strong, with banks benefiting from rising long-term yields. The weakest sectors were those least exposed to a recovering economy. Utilities was the worst performer, followed by health care and consumer staples.

By region, the UK was the best performer, helped by its heavy weighting to energy. Latin America was the weakest region, as its markets were unsettled by the Brazilian government’s decision to oust the CEO of listed oil company Petrobras in response to rising fuel prices.

We believe that many investors are underestimating the durability of the recovery for economically sensitive stocks whose earnings were depressed during the pandemic. To take advantage of the recovery, we have made some significant changes to the portfolio. These are designed to capitalise on opportunities we believe have the greatest rebound potential – including banks, energy, travel, leisure, retail, and industrial goods and services.

One recent addition to the portfolio is Six Flags Entertainment. In February, it was one of our best performing stocks, rising by over 30%. Six Flags operates 26 regional theme parks in North America, making it the world’s largest operator of regional theme parks. The company stands to benefit significantly from the lifting of lockdowns and should be helped by the fact that it specialises in outdoor activities. As lockdowns began, Six Flags moved quickly to safeguard its finances and conserve cash. The company also has a plan to improve profitability, which began before the pandemic. This adds leverage to the earnings recovery and should allow Six Flags to emerge as a better company. We believe that most investors have yet to appreciate this.

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.