Global Market Overview

The recovery which began towards the end of March extended into April with global markets posting positive returns across the board.

The MSCI World index generated a return of 9.04% over the month.  The S&P 500 was the best performing market with a return of 10.87%. Following March’s rout, the FTSE 250 also rebounded in April, returning 9.71% and outperforming the FTSE 100 (3.90%) which was hampered by its exposure to energy.  Asia and Emerging Markets also fared relatively well whilst Japan and Europe were laggards, although both were still able to generate positive returns of 3.56% and 4.63% respectively.

The more positive sentiment was spurred by the enormous fiscal and monetary response by governments and central banks around the world to combat the damage caused by the economic shutdowns and improving data from an increasing number of countries showing that daily infection rates are falling. In some countries, restrictions are being slowly lifted as the authorities tentatively attempt to restart their economies without risking a second wave of infections.

Government bonds continued to benefit from central bank support although they did not do as well as equities, having performed strongly in the sell-off.  Corporate bonds fared even better as risk appetite increased and fears about a major credit crunch were allayed.

The oil price declined 9.61% in April.  Year to date it has fallen by 56.66%. At one point during April the price of West Texas Intermediate oil futures for imminent delivery went negative as the world ran out of space to store it following the precipitous decline in demand. On 30th April Royal Dutch Shell announced that it was cutting its dividend (by two thirds) for the first time since World War Two.

Economic Data

In % GDP Growth Rate Unemployment Rate Interest Rates Inflation
Most recent Previous Most recent Previous Most recent Previous Most recent Previous
UK 0.00 0.50 4.00 3.90 0.10 0.10 1.50 1.70
US -4.80 2.10 14.70 4.40 0.25 0.25 1.50 2.30
Euro Area -3.80 0.10 7.40 7.30 0.00 0.00 0.40 0.70
Japan -1.80 0.00 2.50 2.40 -0.10 -0.10 0.40 0.40
China -9.80 1.50 5.90 6.20 3.85 3.85 4.30 5.20

*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. 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.

Manufacturing PMI Services PMI Business Confidence Consumer Confidence
Most recent Previous Most recent Previous Most recent Previous Most recent Previous
UK 32.60 47.80 13.40 34.50 -87.00 23.00 -33.00 -9.00
US 36.10 48.50 26.70 39.80 41.50 49.10 71.80 89.10
Euro Area 33.40 44.50 12.00 26.40 -1.81 -0.28 -22.70 -11.60
Japan 41.90 44.80 21.50 33.80 -8.00 0.00 21.60 30.90
China 49.40 50.10 44.40 43.00 50.80 46.80 122.00 119.00

Source: https://tradingeconomics.com 11th May 2020

Key Highlights

  • The effects of the crisis are starting to come through in the data most notably in the US unemployment numbers. US initial jobless claims totalled over 20 million for April alone with the total so far since the Covid-19 outbreak began now over 30 million.
  • The US GDP growth rate for the first quarter was down by 4.8%.  It is widely expected to be much worse in Q2 with some economists estimating a further quarter-on-quarter fall of 22%.
  • Having reduced interest rates twice in March the US Federal Reserve is expected to keep rates low until its members can be confident that economic activity is back on track towards full employment and the 2% inflation target.  Dollar strength, weak demand and the falling oil price are likely to keep downward pressure on inflation.
  • The Fed has committed to unlimited government bond purchases. It will also now buy investment grade corporate bonds and high yield bonds (provided that the issuer had an investment grade rating prior to 22nd March).
  • In Europe, economic growth also contracted by 3.8% quarter on quarter and the flash composite purchasing managers’ index (PMI) hit a record low of 13.5, down from 29.7 in March, with a dramatic fall in the services component accounting for most of the decline.
  • The European Central Bank (ECB) continued its quantitative easing programme, putting an increased emphasis on purchases of government bonds of those countries with the greatest need due to the virus, including Italy and Spain. The ECB also eased collateral requirements to include high yield securities in order to support lending to small and medium-sized enterprises.
  • The Eurogroup launched an emergency support plan of EUR 540 billion and the European Council also announced a recovery fund, although the details will not be fleshed out until after further discussions in May.
  • A report by the UK’s Office for Budget Responsibility (OBR) suggested that the economy could suffer a 35% fall in output over the second quarter if the lockdown remains in place for all of it.  In a speech on 10th May, the Prime Minister, having recovered from the disease and returned to work at the end of April, set out some guidance for the gradual easing of the lockdown, although most restrictions remain in place.
  • The trajectory of the virus seems to be different in Japan with fewer recorded cases and deaths, but the government nevertheless declared a nationwide state of emergency in April although the practical restrictions are less draconian than those experienced in Europe. As a result, the economic data has so far been less terrible than expected.  In April, the government replaced the initial plan for support payments to affected individuals with a one-off payment of ¥100,000 to all residents, regardless of income.
  • The People’s Bank of China increased its monetary stimulus and other emerging markets including Pakistan, India, Turkey and South Africa all reduced their key policy rates.  Emerging market currencies generally weakened versus the US dollar.
  • South Korea has managed to contain the contagion relatively well with a comprehensive testing and tracing programme. This helped President Moon Jae-in and his Democratic Party win a large majority in the recent election.

 

Performance of RPW Models over one month to 30th April 2020

All models rose in value over the course of April. The RPW Adventurous achieved a return of 10.81%. This was followed by the RPW Moderately Adventurous which advanced 7.74%. The RPW Balanced model advanced 6.32%, the RPW Moderately Cautious model rose by 4.27% and the RPW Cautious model by 2.81%.

 

Performance of RPW Models over three months to 30th April 2020


Over the past three months, all models have declined in value. The RPW Cautious model fell by 1.58%.  This was followed by the RPW Moderately Cautious model which declined by 3.72%. The RPW Balanced model fell by 5.72%, the RPW Moderately Adventurous model by 7.05% and the RPW Adventurous model by 8.49%.

 

 Performance of RPW Models over one year to 30th April 2020

Following the dramatic fall in early March, only the more defensive models were able to provide a positive return for the year with the RPW Cautious model rising by 2.11% and the RPW Moderately Cautious model by 1.04%.  The RPW Balanced model declined by 0.92%, the RPW Moderately Adventurous model fell by 1.27% and the RPW Adventurous model dropped by 1.42%.

(Source: Financial Express Analytics, Total return, gross of fees, as at 30th April 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.

Funds Update

It is pleasing to report that all bar one of the funds held in the active models achieved a positive return in April with most outperforming their benchmarks. The best performer was TB Amati UK Smaller Companies, held in the Adventurous model, which rose 19.12%.  Merian North American Equity, held in the Balanced, Moderately Adventurous and Adventurous models, rose 12.49%.

The UK funds also did well over the month.  Liontrust Special Situations rose 9.64%, Man GLG Undervalued Assets increased in value by 8.62% and iShares 100 UK Equity Index was up 7.82%.  Eagle-eyed clients will spot that there is a discrepancy between the rise in iShares 100 UK Equity Index fund and the FTSE 100 index return of 3.90% reported on the first page of this commentary.  Although there may be modest differences the iShares fund is designed to track the performance of the FTSE 100 index and over time this is indeed what it has done. However, because the fund’s valuation point is at midday the final price of the month may not fully capture how the market moves before the close at 4.30pm.  On the last day of April, the FTSE 100 did in fact sell off quite sharply following negative news flow from the US and this was not reflected in the month end price of the fund.  The same phenomenon will have affected the other funds thus reducing but not wiping out the magnitude of their outperformance versus the benchmark. Over time, these timing differences are smoothed out.

The one fund which did not generate a positive return over April was L&G Property which declined -0.43%.  Along with several other funds investing directly in commercial property the fund has been suspended from dealing since the middle of March. This is because of the impact of Covid-19 on being able accurately to assess the current market value of properties held by the fund and the action has therefore been taken to protect existing unitholders.  This can present some challenges to investors and we have always been at pains to point out that there are liquidity risks associated with investing in bricks and mortar funds. However, whilst we are monitoring the situation carefully and are mindful of long-term changes that may be brought about by the virus, our current view is that commercial property does have a role to play in the long term strategic asset allocation of portfolios.  We were pleased to receive an update from the managers on 29th April in which they explained the policies they have been implementing to underpin strong long-term performance and the steps they have been taking to support their tenants during this period of unforeseen financial stress. These have included a new model of engagement which they hope will put them in good stead to be the landlord of choice post crisis and moving to monthly rather than quarterly rent payments or three month rent deferrals.

Outlook

Investors will have drawn comfort from April’s strong returns but have markets now rallied too far, too fast? Uncertainties abound and the macro economic data combined with companies’ earnings reports for the second quarter will probably still be shocking even as we are braced for bad news.

Earnings for 2020 are now estimated to decline by over 15% in the US and Europe (the final number could easily end up significantly worse) and further dividend cuts are likely as companies seek to shore up their balance sheets.  Against this backdrop the old adage  “Sell in May and go away” seems quite appealing but the consensus view amongst most market strategists already seems to be one of caution and, as we have often written in the past, deciding when to sell down your risk is one thing but knowing when to reinvest is quite another.  Furthermore, the strong upward momentum we saw in the first few weeks of April has started to fade with the S&P 500 posting a return of 10.36% from 31st March to 17th April but just 0.46% from then to the end of the month (source: FE Analytics, GBP, Total Return).  Markets can no longer be said to be euphorically ignoring all the bad news.

The willingness of central banks to intervene in the credit market has dramatically reduced the risk of a full-blown credit crisis and other government measures, such as the furlough scheme in the UK, may yet prove effective in keeping the economy in a state of suspended animation.  JP Morgan report that 65% of claimants of unemployment benefit in the US are better off than they would have been otherwise.  This may well pose problems for the authorities in terms of encouraging people back to work but it does mitigate against the risks of second round effects from the crisis, so long as demand for goods and services is merely postponed, not destroyed.  Furthermore, whilst there are sectors and companies which have been heavily hit there will also be beneficiaries.

With bond yields being kept low by central bankers, equities do seem to be offering relative value on a long-term view. However, as the “hammer and dance” (initial aggressive action followed by a longer period of efficient vigilance) continues, amidst so much uncertainty, it seems perfectly plausible that equities may well be range-bound over the coming months.

Summary

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.

 

11th May 2020

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