Commentary on May 2020

On A Personal Note…..

We hope this email finds you and your family and friends in good health. Thank you so much for all the positive comments and good wishes during this very difficult time. Whilst we appreciate money matters take a back seat in these unprecedented times, we have been overwhelmed with the kind gestures and positive comments about both our communication and your pleasing satisfaction with our investment performance in what has been a torrid time! Our success is a barometer of the dedicated and committed individuals we have working for us. We are by no means perfect but we are aware of the responsibility we have to you and each and everyone of us is committed to achieving the very best result. As the months roll by, we look forward to getting back to some form of normality.

Market Overview

Stock-markets continued their rally from March’s low, buoyed by a gradual easing of lockdown conditions and further measures to stimulate the global economy. In sterling terms, the US, Europe and Japan were the big winners, rising by 7- 8%; these returns were flattered by currency out-performance against the pound with shares in the UK gaining ‘only’ 3.5%. Government bonds were broadly unchanged but corporate and emerging market bonds improved by up to 8%.

Economic data, though appalling, generally showed an improvement on the previous month. The ‘glass half full’ brigade saw this as the start of a slow recovery from March’s nadir. First quarter GDP numbers confirmed negative growth and the expectation is for far worse in the second quarter, but investors are focussing their expectations on 2021 for signs of any genuine recovery.

Governments and central banks announced further measures to stimulate the economy, and for once it was Europe that pleased investors. Firstly, a Franco-German bailout package was proposed, though not yet approved, comprising largely grants targeted at those economies worst hit by the Covid-19 pandemic. Secondly, Germany announced its own domestic stimulus package and thirdly, the European Central Bank surprised investors with a larger than expected increase in its Pandemic Purchase Program, extended until at least June 2021. The realisation that the EU might finally be getting its act together saw strong demand for the euro and European shares; bonds issued by peripheral countries like Italy, Spain and Greece were also bid up in price.

It wasn’t all plain sailing-investors’ nerves were tested as tension rose (again) between The United States and China. Initially accusations centred around Covid-19 in that China had failed to disclose the facts fully and in a timely manner. But as China sought to impose additional legislation on Hong Kong, this provoked threats of further measures from Trump and a 5% fall in Hong Kong shares.

The latest US employment data, released in the first week in June, confounded investors with a surprise 2.5 million increase in jobs-the loss of a further 8 million had been anticipated. This demonstrated the folly of economic forecasting in the current climate, but pressed the turbo-charge on US shares, which are currently in positive territory for the year!

Our Views

Given the economic and political background, stock-markets have been remarkably resilient since the initial collapse- the broad US market has seen its biggest 50-day rally in over 60 years. Europe has joined in more latterly, buoyed by optimism that, at last, it is grasping the idea of acting as a united Eurozone. However, we feel that too much optimism is priced into markets and that a second phase of the pandemic 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.

Economic data is of little use at the moment; the worst numbers in history merely reflect an enforced stop to economic activity. 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. In normal times, investors are guided by company CEOs as to how well their company is doing, but in the current environment this guidance has frequently been withdrawn, thus leaving greater scope for surprise (good or bad) when results are officially announced.

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 liquidity issues in the investment markets and there have been multiple fiscal packages aimed at helping businesses and individuals. Even the pedestrian EU is close to agreeing bailout measures! German fiscal expansion plus a common fiscal policy are the two measures that investors have long demanded to deal with the structural imbalances at the heart of the eurozone.

What happens next will be driven by the two most important narratives of the day — the attempt to reopen economic activity after the Covid-19 pandemic whilst controlling further outbreaks of the virus, and worsening relations between the U.S. and China as Trump looks to garner support ahead of the November election.

With the return offered on UK savings accounts and government bonds struggling to beat 1%, and many companies cancelling their dividends, this is going to be a tough year for income-seekers. In the near term there may well be further disappointment on the dividend front but we would expect a gradual return to pay-outs next year making a solid long-term case for equities.

How are we currently positioned?

Our March purchases, in the UK and US put the portfolios in a good position to benefit from an improvement in sentiment. Feeling that the recent rally has run too far in the short-term we took some profits and increased cash levels; we think the risk remains of markets selling off again and that better opportunities may present themselves.

Our portfolios diversify risk by investing in a wide range of assets using actively managed funds with sound investment processes. Some examples of these ‘alternative’ assets are funds invested in gold & silver, infrastructure, agriculture and absolute return strategies.

Very best wishes, stay well.