Monthly Commentary – January 2021

As fresh challenges emerged in the fight against Covid-19, the global stockmarket ended January with a modest decline. The appearance of new variants of the coronavirus dampened earlier optimism about a US stimulus package and the reopening of economies. It was a notably volatile month, in part because an army of day traders, coordinating their actions using online message boards, squeezed certain stocks higher. Markets were also swayed by the shift in the US political landscape and the reporting of full year corporate results.

In a bid to curb rising infections and constrain worrying mutations in the virus, governments tightened lockdowns and imposed new travel restrictions. The impact on economic activity and confidence was clear in US labour statistics, which showed some weakness and caused concern about the pace of the recovery. Against this, the gradual ramping up of vaccination programmes offered some grounds for optimism.

After significant unrest in Washington, which led to the second impeachment of Donald Trump, Joe Biden was inaugurated as US president. This, alongside Democratic wins in the Senate election run-offs in Georgia, cemented expectations for a major round of fiscal stimulus, offering important support for economically sensitive stocks. We think that extraordinary stimulus adds to inflationary pressures in a way that is underappreciated by many investors. We believe that our investments in gold miners should thrive in a more inflationary environment.

As investors weighed concerns about the coronavirus against further fiscal support, the vaccine rollout and a potential rebound in economic activity, sector performance was mixed. The strongest sector was energy, helped by an improving outlook for the oil price. Saudi Arabia surprised the market by cutting a million barrels of daily production. We anticipate our energy investments benefiting from a resumption of normal activity as lockdown restrictions are gradually eased. The poorest returns came from consumer staples, a sector that will benefit less from an economic rebound.

The only major region to generate positive returns was Asia (ex Japan), helped by some encouraging economic data from China. Latin America was the weakest region, reversing some of December’s strong gains as the Brazilian central bank adopted a more hawkish stance.

One of our best performers in January was Gilead Sciences, a US bio-pharmaceutical business. Today, Gilead is perhaps best known for offering the first treatment for Covid-19, through its antiviral medicine remdesivir. In our view, the real opportunity for the company lies elsewhere. Its valuation has been depressed by downbeat assumptions for growth. Our view, however, is that this overlooks the opportunity for improvement as CEO Daniel O’Day puts his stamp on the company. Gilead has several interesting new medicines in development and the company is boosting its pipeline by putting its strong balance sheet and robust cash generation to good use. An update from the company in January signalled a return to growth this year, and we believe that the shares can re-rate as the company defies gloomy expectations.

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.