Commentary on February-March 2020
First and Foremost……
Whilst the below provides an update on investment related matters, first and foremost, our thoughts are with you and your loved ones during these difficult and concerning times.
Business as usual
Despite the talk of lock downs, offices closing and restrictions of movement, here at Charlwood IFA we have appropriate measures in place to ensure we can continue to navigate through these challenging times. Our staff are committed, and should the worst happen we have preparations in place for some or all of our staff to work from home without any detriment to the ongoing management of your investments. Whilst markets continue to be volatile these conditions will inevitably present opportunities which we will look to capitalise upon.
It’s been a brutal few weeks, but no doubt you will remember Monday 19 October and Tuesday 20 October 1987 when the FTSE 100 fell 23%. Over the subsequent five years however, it produced a total return of 74.8%. Our robust investment process diversifies risk across a range of asset classes and although it can’t avoid falling prices it is designed to withstand extreme market conditions.
Health, economic and market related news is fast-flowing, rendering most comment out of date by the time of receipt. But we thought it might be useful to give a brief over-view of how we currently see things and how your funds are positioned.
At the time of writing, stock-markets have fallen by 20-30% since the start of the year (in sterling terms) with the UK and Europe around 30% lower and the US and Japan down 20%, helped by stronger currencies. Bond yields hit all-time lows as stock-market volatility reached levels not seen since the great financial crash and it became clear that an enforced economic recession was preferable to the worst excesses of the Covid-19 pandemic.
Interest rates in the developed world now stand at, or below, zero and new fiscal measures are being introduced by the week, as governments and central banks take unprecedented steps to maintain liquidity and ease the financial pain of individuals and businesses whose livelihoods are coming to an abrupt halt.
The US dollar, Japanese Yen and top government bonds have performed well as safe-haven options, but gold, having initially hit its highest level since 2012, has fallen by around 12%, the suspicion being that there were forced sellers of liquid assets.
In the near term, measures introduced by governments or central banks are unlikely to arrest the fall in markets. This is partly due to governments, by necessity, enforcing an economic slowdown by curtailing all activity, and partly because the extended bull market was always going to end badly.
The economics of supply and demand are both taking a hit this time around; supplies of goods have been hit by the closure of factories and businesses whilst discretionary demand has fallen as consumer lifestyles have abruptly changed. The financial measures put in place can’t resolve the underlying problem, as in the financial crisis of 2008-9, but (hopefully) will ensure economic recovery as the world emerges from the pandemic.
It’s a tired old cliché but stock-markets don’t like uncertainty; now that the ‘SARS’ recovery model has been blown out of the water, investors don’t really have a best guess of how bad things can get, so the default position for now is to keep pricing markets lower. The expectation of a recession will find few that disagree, but views vary as to whether we see a strong recovery later in the year or whether the pandemic will prolong the constraints on normal activity.
During the final year of the bull market we felt that stock-markets, with the exception of the UK, were significantly over-valued but they continued to rise. In a similar manner, we feel that valuations are now at a reasonable level, but accept that they’re also likely to over-shoot on the downside.
How are we currently positioned?
We entered the sell-off with record high levels of cash, having deliberately chosen not to re-invest the proceeds from the Woodford repayment. When markets started to fall, in late February, we sold the AXA Biotechnology fund across the higher-risk portfolios; this was because the fund had missed most of the initial fall on hopes of one of the underlying investments finding a vaccine.
Since then we have phased in two rounds of buying across the portfolios at levels that we think represent good long-term value. The first investment was in the HSBC FTSE 100 tracker, the second was to increase the weighting in the Vanguard US Index tracker. The total investment represented around 5% of the portfolio. Cash still remains at a high level to deploy as future opportunities present themselves.