Schemes cannot own same stocks in a downturn as in a recovery

This has, however, created an interesting investment opportunity in which UK equities are now trading at a 41 per cent discount to the equity markets of the rest of the world, and which in December was the largest discount for 50 years, according to Morgan Stanley.

For those investors with a longer-term investment horizon, that fact on its own should be enough to suggest revisiting this out-of-favour asset class, but this is especially so when coupled with the fact that nearly all other asset classes have become expensive and hence offer inadequate future returns and very little diversification.

But we believe it would be wrong to think that buying exposure to the index would be enough to guarantee a good chance of reasonable returns because of the very bifurcated nature of the market.

Investors need to respond to a regime change from the low-growth, low-inflation environment that suited bonds and bond proxy equities, to a reflationary/inflationary one that will suit cyclicals, energy and materials, and value stocks in particular

Third ‘opportunity’ in 30 years

In my 30-year career as a fund manager, there have been two prior occasions in which a market dislocation has created an opportunity for investors to make very attractive returns, and I believe we are now witnessing a third.

The first was in 2000 when investors became convinced that the future was in telecommunications, media and telecoms stocks. 

The second occasion was in 2009 post the great financial crisis, when a belief that the world’s financial system was under threat of collapse caused investors to sell not just those sectors most at risk, but anything remotely cyclical in nature.

It is important to note that these opportunities look obvious in hindsight, but at the time they required a contrarian mindset and a determination to look at the facts rather than yield to a powerful narrative created by many market participants.

We believe this is equally true now. In November, investors were fearful, not just in the UK but globally, that repeated lockdowns would prolong and possibly deepen the economic recession, and it was difficult to see any way out as government advisers had become addicted to locking down the economy as the only possible containment measure.

Covid vaccine changes outlook

The news of a successful vaccine turned previously held assumptions on their head and offered a way out of economically damaging lockdowns, which meant a recovery in 2021 is now a strong possibility.

With cyclicals having been priced for no or little recovery, their share prices responded the most, but the moves were exacerbated by the very lopsided position in which many investors were overexposed to quality growth and underexposed to value as well as by poor market liquidity. 

Since the vaccine announcement, Temple Bar Investment Trust has seen share price growth of 34 per cent on a capital return basis from November 6 2020 to February 10 2021, according to data from Bloomberg.

The stocks that have risen the most from that date to now are those that are poised to benefit from the economic rebound, such as mining companies like Anglo American and energy companies like BP, both of which are up more than 20 per cent.

Investors rotated out of the expensive defensive stocks that they had used as safe havens, and hence the four worst-performing stocks were AstraZeneca, Unilever, Reckitt Benckiser and Sage, which all fell in absolute terms. 

Our instinct is that once more, the extrapolation and overreaction of many market participants is creating an opportunity for those willing to extend their timeframes and try to put the current troubles in the context of the starting valuations being offered. 

The announcement of the vaccine was the catalyst that so many investors have been waiting for. In our opinion, investors need to respond to a regime change from the low-growth, low-inflation environment that suited bonds and bond proxy equities, to a reflationary/inflationary one that will suit cyclicals, energy and materials, and value stocks in particular. 

At the very least, recent movement indicates the dangers of a ‘one bet’ portfolio. You cannot argue that you should own the same stocks in a downturn as in a recovery. 

Ian Lance is co-manager of the Temple Bar Investment Trust from RWC Partners