Global Market Overview
The sharp sell-off that began towards the end of February accelerated into March, as investors dramatically moved to ‘price in’ the increasing inevitability of a deep recession caused by the attempts of governments around the world to reduce the number of deaths from COVID-19. Volatility was exceptionally high and automatic circuit breakers in the US meant that the stock markets were temporarily suspended from trading on a number of occasions due to the sizes of the moves. From peak to trough from the 19th February to 23rd March, the MSCI World index fell 25.57% in sterling terms (-33.92% in local currency terms). The FTSE All-Share declined 33.09%. Falls this fast and steep are exceptionally rare and plunged global stock markets firmly into bear market territory. However in the final week of the month, following unprecedented action by the world’s central banks and government to shore up their economies, markets rallied strongly with the FTSE All-Share index advancing 18.36% and the MSCI World index rising 12.43% in sterling terms as the dollar weakened (the return in local currency terms was 20.82%).
The MSCI World index ended the month down 10.62% with Japan, Asia and the US faring relatively well and the UK, Europe and Emerging Markets underperforming the global index. In the UK mid cap stocks were hit particularly hard, with the FTSE 250 index falling 25% over the course of the month.
Government bonds did well again in March with yields declining further (meaning prices rose) although there was volatility in prices as panicking investors at first indiscriminately sold liquid assets in order to raise cash. Over the quarter the US 10-year yield dropped from 1.92% to 0.63%, the German 10-year yield dropped from -0.19% to -0.49%, France’s from 0.12% to 0% and the UK 10-year yield fell from 0.82% to 0.32%. The Italian 10-year yield rose from 1.41% to 1.57% and Spain’s from 0.47% to 0.71% as investors reacted to the high number of coronavirus deaths in these two countries and their relative economic weakness. Riskier corporate bonds and emerging market debt declined in March. For a few worrying days companies were unable to issue bonds although this later improved when the US Federal Reserve announced it would buy corporate bonds.
The oil price almost halved in March as OPEC and other oil producing countries including Russia failed to agree on an extension to production cuts and on the greatly weakened demand outlook brought about by the virus.
*In the Euro Area, the main refinancing rate is 0 and the deposit rate is -0.5 percent
It is important to note that much economic data is lagging. For example, GDP is reported at the end of each quarter and the figures here represent Q4 2019. The Q1 2020 data has yet to be published. Variation in the reported numbers from month to month represent intra-month revisions and not all countries report their data at the same time or use the same metrics, so these tables offer a rough guide only.
Source: https://tradingeconomics.com 15th April 2020
- Although the severe economic contraction, widely expected as a result of lockdowns to contain the virus, does not yet show in the official figures, the purchasing managers’ indices for both manufacturing and particularly services have declined dramatically in all areas, with the exception of China where the data is showing signs of a strong rebound.
- The US Federal Reserve and the Bank of England both cut rates twice in March and announced significant quantitative easing programmes to support their governments efforts to keep the economies afloat.
- The US Senate passed a $2 trillion stimulus package. The proposed package includes $250 billion worth of direct payments to households, $500 billion for loans to distressed companies and $350 billion for small business loans.
- The European Central Bank announced the Pandemic Emergency Purchase Programme (PEPP) – a €750 billion scheme. The PEPP will fund the purchase of government and corporate bonds until the end of the COVID-19 crisis. Governments across Europe also announced spending packages to help businesses and households bridge the gap between the loss of income during this period of disruption and the expenditures required to survive.
- The UK also unveiled an unprecedented series of fiscal support measures including a furlough scheme providing support for 80% of workers’ salaries in businesses impacted by the effects of the lockdown.
- The spread of the virus in Japan appears to have been slower thus far so measures to combat it have not yet been as stringent as elsewhere. The Olympics have, however, been postponed to July 2021. The economic impact of this is limited, representing, it is thought, only around 0.2% of GDP shifting from this year to next.
All models provided negative returns for the month of March. Unsurprisingly the strongest performance came from the RPW Cautious model which fell by 3.23%. The RPW Moderately Cautious model declined by 5.49%. This was followed by the RPW Balanced model which lost 7.47%. The RPW Moderately Adventurous model dropped by 8.63% and the RPW Adventurous model by 10.60%.
Performance of RPW Models over three months to 31st March 2020
Over the past three months, all models have declined in value. The RPW Cautious model fell by 3.48%. This was followed closely by the RPW Moderately Cautious model which declined by 6.93%. The RPW Balanced model fell by 11.19%, the RPW Moderately Adventurous model by 13.97% and the RPW Adventurous model by 18.15%.
Following the dramatic sell-off in February and early March, none of the models was able to post a positive return for the year. The RPW Cautious model proved the most defensive, declining by 0.04% followed by the RPW Moderately Cautious model which fell by 1.99%. The RPW Balanced model declined by 4.66%, the RPW Moderately Adventurous model fell by 5.68% and the RPW Adventurous model dropped by 7.42%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 31st March 2020).
Please note that these figures are unaudited and indicative. The performance of actual client portfolios may be different. The effect of fees will reduce the returns achieved.
Generally speaking, all funds held in the RPW models have performed in line with expectations with government and corporate bonds funds faring better than those invested in equities. One outlier has been Man GLG Undervalued Assets which lost 25.07% in March. This compares to the 15.1% fall in the FTSE All-Share Total Return index over the same period. This is very disappointing but not altogether surprising given its investment style and the areas of the market in which the fund is invested.
The fund adopts a so-called value style meaning that the managers try to identify pockets of the market which, in their view, are offering the most value. This often requires a contrarian approach to investing, seeking out companies that are being overlooked by other investors. This contrasts with a so-called growth style of investing where investors are willing to pay higher valuations for a company perceived to offer better growth prospects. Since the global financial crisis of 2008/9 growth has outperformed value, a trend which has accelerated since 2017. The valuation gap between the two styles of investing is now wider than the gap between technology and “old economy” shares during the tech bubble of 2000-2001.
We feel it is appropriate as part of portfolio diversification to have some exposure to a value investment style, hence including it in our models. The other two UK holdings are Liontrust UK Special Situations (which has a growth investment style) and a FSTE 100 tracker fund, both of which performed better over the month. Unfortunately, much of the value identified by the fund manager in Man GLG Undervalued Assets is in more cyclical areas of the market which have suffered particularly harsh treatment in the current crisis, notably housebuilders and airlines such as IAG (owners of British Airways) and EasyJet. However, we believe that the manager’s emphasis on strong balance sheets should help the companies held within the portfolio survive and therefore that the potential for him to outperform through stock selection has not diminished.
Given the exceptionally high level of uncertainty we believe that this fund will likely experience higher levels of volatility both compared to its peers and its own history, but we nevertheless feel that this should be tolerable within the context of a diversified portfolio. It is worth remembering that volatility is most often felt on the downside but can also be observed in rising markets. Since 23rd March to 7th April the fund has risen 19.06%, outperforming the FTSE All-Share return of 15%. This also serves as a powerful reminder of the difficulty in trying to time entry and exit points in the markets.
It remains to be seen whether equities have found a bottom or whether new lows will be tested but there are other signs of stabilisation in risk sentiment as investors respond to the extraordinary monetary and fiscal response from governments around the world. These include a sharp reduction in yields on peripheral European countries’ government bonds after the European Central Bank (ECB) stepped up its support for the bond market, clearly doing its best to avoid a recurrence of the sovereign debt crisis from a decade ago and slightly lower demand for the perceived safe haven of the US dollar. A weaker dollar not only helps beleaguered emerging market countries but also eases financial conditions for the corporate sector in the US.
Many uncertainties remain and are unlikely to be resolved until we know how long the social and economic shutdown is required to last. With signs of stabilisation in Europe all eyes are now focused on the US where there is yet to be a consistent approach at the federal level with each state adopting different measures. A further key question is whether there are further outbreaks of the virus in regions where it now appears to be under control and what containment efforts are required to combat them.
Turning to the equity markets we don’t yet know the extent of earnings downgrades which is making it extremely difficult to value companies nor do we know the full extent of dividend cuts but it is possible to argue that some, if not, all of the bad news has been priced in and it will be down to our underlying managers to determine where the opportunities lie.
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
15th April 2020