Commentary on March 2020
First and Foremost……
During these very worrying and concerning times we realise that money matters become insignificant in comparison with your safety and good health of you, your family members and friends. Our objective at this moment in time is to reassure you that we have your investments in hand and you can trust and rely upon us to continue to navigate through these volatile and difficult markets. As mentioned in our last communication our employees are committed and are either working from home or the office and therefore the management of your investments is unaffected.
With news flow running at such a pace we feel that, for now, rather than reporting on the specific calendar month it’s more useful to keep you up to date with our current views.
At the time of writing, stock-markets have rallied a bit since our last commentary in mid-March; in sterling terms, the UK, Europe and Japan are 5-6% higher with the US gaining just over 3%. Overseas markets have shown larger gains in their own currencies but a stronger pound has reduced these in sterling terms. Government bonds have small gains but those with lower credit ratings are continuing to suffer. Year to date numbers show that, in sterling terms, the US and Japan have lost around 11% (both boosted by stronger currencies), Europe and Asia are down 16% and the UK has suffered the most with losses of over 20%.
Economic data is reflecting the deliberate collapse in activity (a necessary consequence of isolation) with sentiment surveys pointing to a sharp contraction in growth. In the United States recent employment data was far worse than expected; this is at least partly due to the initial US fiscal package being designed to compensate those who lost their job, rather than to prevent job losses such as in the UK. Lack of demand for oil, combined with continued squabbling over production cuts, saw its price fall to a 17-year low.
Governments and central banks announced further measures to combat the spread of the virus, as well as major initiatives to soften the impact on businesses, individuals and the continued functioning of the investment markets. The Bank of England’s Monetary Policy Committee cut interest rates to an all-time low of 0.1%.
An additional pragmatic, but less welcome, move was to ‘encourage’ the banks and insurance companies to suspend paying dividends in order to build up a stronger capital base to cope with the financial strains ahead. This, along with several necessary dividend suspensions, will hit those who rely on a regular income from their investments in the short term.
The past few weeks have seen an unprecedented increase in the use of the word ‘unprecedented’, used in health, economic and market commentaries. This has frequently been used to explain the lack of conviction in where we go from here with no clear models to follow. Some market commentators have attributed recent behaviour to the Five Stages of Grief, where ‘acceptance’ is required before the market bottoms. Others are comparing this fall to charts of previous crashes where a sharp rally, which we’re currently seeing, is followed by a further fall to a slightly lower and more prolonged base.
Contrarians would argue that If investors are holding off in the hope of a better buying opportunity at lower levels then this is less likely to happen. However, we suspect there’s more to it than that with too many crucial ‘unknowns’ outstanding. The current rally has been driven by a belief that the virus may have peaked in terms of new cases and the daily rate of deaths will follow a similar pattern with a lag. But it’s too soon to be confident and a second phase of the pandemic, and consequent isolation period, can’t be ruled out. It will also take time to determine just how badly businesses and individuals have been affected and in what financial state they emerge from the crisis.
On a more positive note, governments and central bankers have acted with a greater sense of urgency than during the previous crisis. Measures were quickly announced to counter (some) liquidity issues in the investment markets with central banks committing to buy unlimited amounts of corporate, as well as government, bonds. The US Federal Reserve has made dollars available via swap facilities and cheap funding has been offered to smaller businesses. There have also been fiscal packages aimed at helping individuals. These measures can’t solve the pandemic, nor were they designed to, but the hope is that they will keep a large portion of families and businesses solvent and in a position to boost economic activity when the all-clear is given.
Corporate earnings will fall in the near term, the extent of which we won’t know for some time, and there will be a hit to investment income this year. But investment models show that valuations have now fallen to attractive levels, and continued market volatility will provide opportunities to invest for good long-term performance.
How are we currently positioned?
Our recent purchases, in the UK and US have put the portfolios in a good position to benefit from an improvement in sentiment. We still have cash to put to work, but we think the risk remains of markets re-visiting the lows and that better opportunities may present themselves.
You may have read that UK property funds have once again suspended dealing; we’d like to re-assure you that none of our portfolios hold property funds, and haven’t done so for some time.
Our portfolios invest in a wide range of assets using actively managed funds with sound investment processes, designed to diversify risk. As a result, while any losses are disappointing the portfolios have fallen by far less than the FTSE.
Our office telephones are open, please feel free to phone, we will be happy to help in any way we can. Stay safe and well.