Welcome to our latest investment commentary covering the second quarter of 2020. This update provides some more in-depth commentary on the markets and our views moving forward.
The markets have continued to rally this year, despite a fairly poor backdrop. As expected, the economic situation following the COVID-19 pandemic has been weak and the effects from this are likely to be felt for some time. Unemployment levels remain elevated and we are seeing a daily flow of job cuts. The US saw ten years’ worth of job growth disappear in just four months. We also feared the possibility of a resurgence in viral infections, which we are now seeing in the US and in some other countries.
“Counterintuitive” is the word frequently being used to describe many of the things we are seeing in the markets at the moment. The explanation so far lies with the Central Banks and Governments and the huge amount of stimulus they have provided. It is possible that the Central Banks will need to continue providing support for years to come.
The world has changed. We have been busy over the quarter making some adjustments to the portfolios to steer them in a new direction to reflect this. This topic is covered in further detail in the market outlook.
Q2 2020 REVIEW
The recovery in the markets has perhaps been more surprising than the sell-off in March for the reasons mentioned earlier. However, the recovery has not been symmetrical.
The oil price (Brent) for example has rallied about 40% during the second quarter, but it remains over 35% below its starting value for 2020 due to the spectacular fall in the first quarter.
The FTSE 100 has rallied 24% from the low point at the end of March, but it remains almost 16% down this year. The FTSE 250 is in a worse position.
Other equity markets fell by similar magnitudes. However, the German DAX has recovered to be down by less than 4% this year. The S&P 500 in the US is now down less than 2%.
A notable exception is the Nasdaq, a US market heavily exposed to technology companies, which is up almost 17% this year.
The recovery has largely been confined to a few specific areas of the markets, namely Healthcare and Technology companies. As lockdowns took hold at the start of the quarter, this naturally led to a surge in online activity and the demand for virtual services, with some high-profile winners such as Zoom Video.
On the other end of the spectrum, companies with a focus on paying dividends came under significant pressure. This was particularly the case in the UK, where the Government provided bailouts on the condition that the cash was not used to pay dividends. This led to a raft of cancelled or reduced dividends, making the share price recovery of those companies uncertain. Companies such as Barclays, Lloyds and Shell are still heavily down this year.
We, therefore, decided to sell our exposure here in early May and invest in the Technology and Healthcare sectors.
As the quarter progressed, some optimism developed around the potential economic recovery and that it may be quicker than originally thought possible. This sent a positive tone through the markets, helping them to continue higher.
The success seen in Europe with tackling COVID-19 looked like it could be repeated in countries such as the US. However, the quarter ended with a little more caution as a new wave of cases in the US saw daily recorded infections rise as high as 50,000. Unlike the first wave in the US, the number of deaths does not appear to be rising at the same rate which may be an encouraging sign.
Direction of Travel
A number of technological trends were already in motion prior to the COVID-19 pandemic such as the use of cloud computing, with Amazon’s Web Services (AWS) and Microsoft’s Azure leading the way. However, the response to the pandemic has led to the adoption of these to accelerate, as business practices have had to change. Importantly, we do not believe this to be temporary.
Until a vaccine is found, we are unlikely to see any normality return to the workplace. The change in business practices, however, has made many businesses realise that they can operate just as effectively working remotely and virtually. In some cases, productivity has increased. Technology has sufficiently developed to enable this and for many, this could lead to cost savings.
When thinking more broadly about this, we have seen and will continue to see an acceleration in the adoption of many other areas. Online shopping is an obvious one, but the secondary growth areas to this are Fintech, Cybersecurity and digital payments to name a few. The common theme across most of these strong growth areas is that they reside within the Technology sector.
Healthcare also falls within this to some extent, due to technological developments leading to advances in Genomics and gene editing for example. However, as with some areas within the Tech sector, new areas of growth are accelerating such as virtual care solutions. Teladoc Health has become a well-established player in the US market and is a recent purchase in the Baillie Gifford Positive Change fund, which has just been added to some of our portfolios.
Lastly, investing with Environmental, Social and Governance (ESG) factors in mind often leads to strong exposures being gained to the Technology and Healthcare sectors. This is accompanied by another growth area, renewable energy.
It is for the reasons above that we are slightly changing the direction of the portfolios and the nature of their construction, to become more thematic and to express these areas more prominently. We have already taken steps towards them and hope to gain our full allocations over the next few months.
President Trump has struggled with the COVID-19 pandemic because prior to the pandemic, his focus has always been on the economy and how well it was doing under his presidency. The pandemic has led to some of the worst economic data in a generation and so it is no surprise that he has resisted locking the country down. In his own words “Our country wasn’t built to be shut down”.
Only a few months ago, a Trump victory was almost a given, but this has changed dramatically and now there is a real chance that he could actually lose the election. It is not yet clear what impact this could have on the markets, but it’s likely that Trump will not go down lightly.
In aggregate, we feel more positive about the medium-term outlook for the markets and sectors we have mentioned and are excited about the new funds being brought it. The lead up to the US election could lead to some volatility in the markets because historically, the Democrats have not been as positive for the markets.
Brexit has been overshadowed by the events this year, but talks are underway again with the EU given the deadline this year.
We will shortly be making changes to our advisory portfolios. Please keep an eye on your inbox for the fund switch notification.
As mentioned, we have made some changes during the quarter. A full account of the changes can be found below:
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.