Welcome to our latest investment commentary covering the first quarter of 2020. This update provides some more in-depth commentary on the markets and our views moving forward.
We hope you and your family are keeping well through these extraordinary times and would like to thank those of whom are on the front line, fighting against this pandemic.
Q1 2020 REVIEW
This quarter could prove to be one of the most memorable of our lifetimes. The COVID-19 pandemic has not only led to extraordinary measures that have had a material impact on many of us, but naturally has also had a significant impact on the markets.
The economic outcome from these is still unfolding, leading to Central Banks and Governments across the world deploying vast sums in aid to support both individuals and businesses.
As we see the peak of the outbreak pass in some parts of Europe, there is some hope that other major economies such as the UK and US, will eventually follow suit. The upshot is that once we are through this pandemic there will be a great deal of stimulus in the global economy, followed by what is likely to be a pickup in consumer spending, due to pent up demand.
The portfolios have generally moved in line with expectations during this volatile time and it should be no surprise that all portfolios fell by more than 10%, with the higher risk falling more than the lower risk portfolios. To provide some context, over the same period, the FTSE 100 fell as much as 33%, the FTSE 250 fell 41% and S&P 500 fell 31%.
It is worth mentioning that income funds with a dividend focus were particularly hard hit. This is partly because they happen to invest in areas of the market that came under a lot of pressure, but also that Government stimulus efforts have been done on the basis as to exclude the pay-out of dividends and dividend payments, in general, are being frowned upon. Therefore, many companies that are favourites among dividend seekers have been hit even more so and their short-term future looks challenged in terms of a recovery in their share prices. For example, HSBC, Barclays, RBS and Lloyds announced last week that upcoming dividends have been cancelled.
As you know, given the economic uncertainties that persist, we decided to reduce the risk levels in the portfolios during the recovery seen towards the end of March by raising cash. One area we focussed on selling was a UK income fund due to the reasons mentioned above. We expect to be deploying some of this cash back into the markets over the next month or two.
Whilst the virus appeared to have been contained within a small region of China, the drama really started when there was a sudden outbreak in Northern Italy, prompting the authorities to quarantine a number of small towns. Naturally, this quickly spread across Europe, with Spain in particular being affected.
The negative market response was very swift. If that was not bad enough, a fallout between Russia and Saudi Arabia in relation to the reduction in oil output led to the Saudi’s threatening to ramp up their oil production. The oil price subsequently fell by almost 60%, accelerating and magnifying the falls in the markets.
As mentioned, this prompted a number of central banks and Governments to intervene with huge stimulus packages and falling interest rates. Whilst ultimately positive, these announcements were met with yet more market falls as investor fear grew around the economic fallout.
The volatility was also seen in the currency markets, where the US Dollar exhibited its usual safe haven demand. The GBP/USD exchange rate moved from $1.32 to $1.14 in just 10 days. This acted as a cushion for some of our US Dollar denominated positions.
Lastly, just when we thought the yields on Government bonds were unlikely to go much lower, they collapsed to record low levels as traders scrambled to safety. The yield on the UK 10 year Gilt briefly fell below 0.2%.
No one yet knows the true economic fallout from this pandemic. However, we do not believe this will be a very prolonged event. Taking China and Italy as examples, it seems three to four months is the approximate timescale for the virus to follow the so-called bell curve. China is almost back to being fully operational and we have seen this in the recent economic data which has jumped back up from a depressed level. We expect to see a similar outcome in other parts of the world as they too emerge from this.
As the various lockdown’s come to an end, debt will be cheap and may help to fuel a pickup in spending and we could also see a buoyant property market. Life should start to normalise, and we, therefore, believe that we could be in the midst of a good buying opportunity.
It is for this reason that we currently have plans to increase the equity weighting in the portfolios once the cash is redeployed in the markets.
One area of interest could be the US election in November. President Trump has repeatedly hung his hat on how good the economy and stock markets have been under his Presidency. Clearly, both of these have reversed in spectacular fashion and could derail his attempt at being re-elected.
A further area of interest is inflation. Inflation has been almost non-existent since the Global Financial Crisis, despite the enormous stimulus efforts of many central banks. However, given the significant fiscal packages being seen of late, history shows us that inflation usually rises following such fiscal measures.
We made a change towards the end of the quarter, where we felt the level of uncertainty was such that is was sensible to reduce the risk levels in the portfolios and raise cash. We waited for the markets to exhibit some sort of recovery, which they finally did in the last week of March. The move-up was just as swift as the moves down, taking just 3 days to recover a third of the losses. For the US markets, this was the largest 3 day move up since the 1930s. It was at that point that we instructed the sales.
A full account of the sales can be provided upon request.
We understand that at the moment the market falls are possibly just one of the concerns or uncertainties that you may be dealing with on a day to day basis. We hope the Vanguard infographic below offers some perspective and comfort in the knowledge that on average over the very long-term Bear markets last 1.3 years; and that Bull markets are more frequent and last much longer than Bear markets. We would, therefore, like to reiterate that we should remain focussed on the plans we have put in place for the long-term and look through this short-term weakness, concentrating our energy on keeping ourselves and our families safe at this time.
We hope you find this review informative and look forward to hearing from you if you have any questions.
This publication has been prepared for information purposes only by Carrington Investment Consultants Ltd and does not constitute financial advice. The value of investments, and any income generated from them, will be affected by interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. Investors should be aware that the value of units may well fall as well as rise, is not guaranteed and that past performance is not a guide to future performance.