Coronavirus (COVID-19) Update – 29th May 2020

Whilst the UK has been gripped by the “Cummings and goings” of the Prime Minister’s chief advisor, global stock markets have been making steady progress, responding, it seems, to the easing of lockdown conditions around the world.

The MSCI World index rose 7.13% in sterling terms over the past fortnight. All the major indices posted positive returns except for MSCI All Countries Asia-ex-Japan which declined by 0.53%, with investors rattled by Chinese moves to take further control in Hong Kong and rising US-China tensions. Meanwhile the oil price rose a further 18.46% following on from its 22% rise in the preceding two weeks, although it remains down by almost 50% year to date. (Source: FE Analytics, 13th May to 27th May).

It is worth pointing out that the MSCI World index is now only down 0.95% year to date, with the chart below illustrating the strong recovery since the mid-March lows. Not quite V-shaped but certainly a Nike swoosh, a term that was being bandied about some weeks ago as economists speculated about the shape of the recovery.

Most interesting perhaps is that, in the last two weeks, there has been a marked change of market leadership. We have talked about the valuation gap between so-called growth and value shares in previous updates. Growth shares, as defined by the Russell 1000 Growth index of U.S. large caps hit an all-time high, relative to the equivalent value index, on 15th May, exceeding the previous record set in early 2000, just before the bursting of the dot come bubble. Since then the index has underperformed by around 5% with most of the change of direction occurring since Monday of this week. Even in the UK which does not have a technology sector (the dominant sector in growth indices) to speak of, we can observe a similar shift in sentiment in the performance of the three funds which are held in the RPW models, upon which many client portfolios are based.

We have written about Man GLG Undervalued Assets in our monthly commentaries and following its woeful performance in the sell-off, clients can be forgiven for asking why we hold it. Whilst it is still down a painful 27% so far this year, we have nevertheless been encouraged by its strong showing in the past week, rising almost 12%. This compares to a return of 6.82% in the more growth oriented Liontrust Special Situations (down under 10% year to date).

Those familiar with Man GLG Undervalued Assets will know that it holds a number of economically sensitive companies such as Easyjet and housebuilders, Redrow and Bellway as it is these which were offering the most value in the opinion of the fund manager, Henry Dixon. Clearly these companies suffered hugely when the economy effectively shut down overnight as lockdown was imposed and investors might reasonably have feared that they were so called “value traps”. However, the manager’s conviction was that they had strong enough balance sheets to ride out the storm and that they were trading at prices far below their fair value on any measure. Their share prices have rallied strongly in the last week which makes sense if investors are becoming more optimistic about the economy. Much of the reported data which is backwards looking continues to be depressing with the number of people claiming unemployment benefit increasing by 856,000 in April, implying a jump to circa 6% unemployment when April’s official rate is released. However other data such as energy consumption and road traffic points to improving levels of activity as the country gets back to work with more shops and services being allowed to open every few weeks.

It is conceivable that value shares will continue to outperform, taking up the baton to drive markets higher from here, despite them looking rather expensive in aggregate. This feels especially likely if there is an uptick in inflation (oil price on the rise again?) although with the Bank of England for the first time ever discussing the possibility of negative interest rates it is clear they regard deflation as the more imminent threat. The major caveat to this rosier scenario is, of course, the possibility of a second wave of infections and a double-dip recession. It is therefore too early to say whether or not this recent run of outperformance will be sustained but it does serve to remind us why its important not to put all one’s eggs in the same style basket.

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.

 

29th May 2020
RiverPeak Wealth Limited

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