Coronavirus (COVID-19) Update – 15th May 2020
Another fortnight has passed and as one day in lockdown merges into another it is hard to pinpoint if anything material has changed despite no let-up in the daily flow of news. There has, however, been a change in market direction with all equity indices, except for Japan, posting negative returns over the past two weeks. It always feels somewhat spurious to attribute a market move (particularly over such a short time span) to the news flow but we shall nevertheless try to unpick what has been happening.
Market returns in % from 29th April to 13th May
|Asia ex Japan||1.59||-0.16|
|UK Corporate Bonds||0.16||0.16|
|FTSE All Share||-3.66||-3.66|
Source: FE Analytics. Europe: FTSE World Europe ex UK, Asia ex Japan: MSCI AC Asia ex Japan, Japan: TSE TOPIX, Emerging Markets: MSCI Emerging Markets, Gilts: FTSE Actuaries UK Conventional Gilts All Stocks, UK Corporate Bonds: ICE BofAML Sterling Corporate, US Treasuries: ICE BofAML US Treasury, Oil Price: Brent Crude. All indices are total return in currency indicated.
In our last update we expressed surprise at the seeming ease with which markets had been able to shrug off the slew of increasingly weak economic data being reported as a result of the shutdowns. We know this data is likely to get even worse in the coming months and reports of rising infection rates in Germany, following their partial lifting of some of their restrictions, are cause for concern. Perhaps, then, we should be relieved that investors are now showing some caution. Whilst we all prefer up to down days, we know that markets do not go up in a straight line and that volatility is the price we pay for cash-beating returns.
Looking at the table above, it is notable that the FTSE All Share is languishing at the bottom of the table (in local currency terms) as it has done so far this year and over the past one, three and five years. It has been a while since we mentioned the dreaded “B” word but, post Brexit on 31st January, the UK has yet to thrash out any kind of EU trade agreement and the deadline to ask for an extension is looming in just six weeks. This coupled with an index that is dominated by sectors such as financials and energy, which have been forced by the crisis to slash their dividends, but which contains no exposure to tech giants equivalent to Amazon or Alphabet, it is perhaps less surprising that when markets participants are nervous, they sell UK shares. Fears that the UK government may not have handled the crisis as well as they might have done, the relatively high death toll and widespread disagreement, within the (not-so) United Kingdom, about the Prime Minister’s latest road map to the gradual lifting of the lockdown, announced on Sunday, may also have had their part to play.
What is interesting is that the S&P 500 has fared marginally worse over the past fortnight in local currency terms. It is too short a time period for any meaningful attribution, but we would just note that when risk sentiment is negative the dollar tends to do well, remaining secure in its status as a safe haven currency.
At the top of the table is Japan. Again, this is not really significant but it does bring to mind some research we came across this week which highlights that the high level of cash hoarded by Japanese corporates which is often criticised for being a drag on profitability may nevertheless provide exactly the balance sheet buffer that companies need in these extraordinary times when the global economy grinds to a halt and demand collapses, virtually overnight. According to Baillie Gifford, 54% of TOPIX non-financial companies are net-cash, versus 14% for the S&P 500 and average pay-out ratios for the TOPIX are 34% versus 91% for the FTSE 100, meaning there is plenty of headroom for current dividends to be maintained. An example of a business with astonishing resilience is factory automation company Keyence, which has over ¥1tn of cash on the balance sheet which is enough to survive for 17 years of lockdown!
What does this all add up to?
Investors should expect more volatility, be sanguine in the face of market sell-offs (as long as they are comfortable with the level of risk in their portfolios overall – if not then they should speak to their advisor) and make sure that their equity portfolios are diversified by currency, sector and geography.
We hope that all our clients stay safe and well. Please do get in touch if there is anything you would like to discuss further.
15th May 2020
RiverPeak Wealth Limited