Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update, the first of 2021, so let me wish you a happy new year. Equity markets [have] been fascinating over the course of the last few weeks. We’ve been reminded, I think, by the virus that it’s still got a few tricks up its sleeve. The new variants that are now emerging appear to have high levels of transmissibility, and this is obviously of concern because investors were hoping that after the discovery of some very successful vaccines that we could look forward to 2021 being a year of economic recovery and some sort of return to normal. It seems as though the race between the virus and the vaccines has still got a way to go and this has led to some volatility within equity markets as the equity market tries to weigh up and judge whether it’s the virus or the vaccine programs which happen to be in the lead at any one particular moment in time.

That’s denying equity markets a strong collective narrative at the moment. And this is perhaps an unsettling development for equity investors. I mean, a narrative is often very welcome because although people can disagree, there is a general consensus as to what the topic of discussion should be. Whereas at the moment, the virus is, and the pandemic and the rate at which we exit, the recovery in interest rates, the change in inflation expectations, the movement in commodities and what’s happening in exchange rates, all of these things are impacting the discourse around investment markets and equities is being caught up in that. So we’re seeing some increase in volatility. Even if you can’t necessarily see it at the headline level, but beneath the surface we’re witnessing some high levels of volatility.

So for stock pickers like ourselves, this is more than ever the moment to be very thoughtful and careful about the risks one’s exposed to within the portfolio. Our preferred approach is to let the companies do the talking, so to speak, and we don’t want these exogenous issues to impact the returns. So we’ve been paying particular attention to how some of these discussions have been continuing with the market, really paying attention to the context of investment markets. And so those of you sort of closely following what we’ve been doing will have noticed that early in December we made a slight change to the positioning within the portfolio, reducing the weight of some of our holdings within utilities and increasing exposure within financials, particularly the banking sector. And the thinking behind that was that the utility sector is very long duration so it benefits in particular from low interest rates, and that has been very successful for the portfolio.

Unintentionally, we positioned in the right place but when interest rates fell that part of the portfolio was a relatively strong performer for us. Now we’re looking at it and thinking—looking at the balance of risks in front of us and thinking to ourselves that well, if interest rates were to change from here, probably to go up, that would be a headwind for that part of the portfolio. And because of its relative success, it’s actually become perhaps too big in the context of the other stock-specific risks within the portfolio. So shaving it, trimming the position made a lot of sense, and adding that to something which is more sensitive to rising interest rates on the positive side, made to us made a lot of sense because the banks will tend really to do better in rising interest rates. Net interest margins will expand. And, of course, if we do end up with economic recovery, then considerable loan loss provisions that were taken in the earlier part of the pandemic may not be required, helping profits and the prospect of capital returns to investors.

So that’s, we think, taken us back to perhaps a more neutral position in terms of the direction of interest rates which is really our sweet spot; it’s where we want to be. We don’t want to be expressing a view on the direction of interest rates in the portfolio, but I would say it’s a good example of how looking at the context of the market, observing how the changing narratives are changing the risks that investors are facing, we’ve taken the decision to make a small, modest change in order to reposition the portfolio so that it’s the stock-specific risk which will continue to drive the performance that we expect and hope to see in the future.

I hope that’s been of interest and I look forward to catching up with you again soon.