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Is now the time to rethink your approach to dividends?

Please see the below market commentary from Brewin Dolphin from the 5th June 2020 regarding the potential role of dividends to investors:

The best laid dividend plans of companies and investors have been disrupted by the coronavirus. For many investors, this could make a significant difference in the short term. Guy Foster, our head of Research, asks whether now might be the right time to rethink the role of dividends in your portfolio.

On 30 April, Shell cut its dividend for the first time since the Second World War. The decision was seen as significant, given Shell’s then-position as the UK market’s largest dividend payer.

With this painful reminder that dividends tend to be an intention, rather than an obligation towards shareholders, some may ask themselves if this may be the time for investors who are seeking to generate an income from their investments to consider new tactics. Assessing the performance of a business on a total return basis – ie looking at any appreciation in the value of the shares, as well as the dividends – is quite a different approach, but may provide more flexibility for the future.

The role of dividends

Over recent months, shareholders around the world have been asking whether, in the face of an unprecedented period of financial stress, such dividend cuts are prescient or prejudicial – and whether companies are still working for their investors?

In the 1980s and 1990s paying a regular dividend was seen as imposing a form of discipline which prevented management from indulging in more wasteful uses of what ultimately is shareholders’ cash. Never was this in greater focus than during the temporary madness of the technology bubble, in which some companies made spectacularly badly judged investments while others, who concentrated on the steady production of a dividend, weathered the subsequent bear market far better.

Perhaps scarred by that experience, investors and companies resolved that returning cash to owners was a priority. In the UK, dividends were the means of doing this and investors have grown used to the regular payments.

However, there is a fine line between a dividend policy which imposes discipline on a company and one which becomes a straitjacket. It would be an exaggeration to see the focus on dividends as the reason for the UK’s relative dearth of fast-growing companies, but such a firm income focus does not come without its costs.

Alignment with shareholders’ long-term interests

Problems arise for businesses when they are not performing sufficiently well for their dividend payments to be for the long-term benefit of the business.

Shell were reported, earlier in the year, to be extending their credit facility in order to be able to meet their upcoming dividend payment. The question for the board would have been whether taking on additional debt to meet this payment was the right thing to do for the long-term benefit of the company. Clearly, they decided it was not and shareholders’ long-term interests were better served by retaining more capital in the business.

When pressure to maintain the dividend prevents companies from investing well, or reducing debt appropriately, then the long-term prognosis worsens for all stakeholders.

The need for financial and strategic flexibility, which a rigid dividend policy can inhibit, is heightened by the change and disruption that has become a common feature of product and service markets. A more pragmatic distribution policy, in contrast, can support that flexibility.

There have also been advances in corporate governance which mean that management are more accountable to shareholders and their compensation is increasingly aligned with factors that drive shareholders’ long-term returns. This reduces the need for a yoke-like dividend policy.

Assessing the quality of the management and their alignment with shareholders is an important part of understanding what kind of return investors can plan for.

Different attitudes to dividends

In my eyes, one of the very best private client investments is shares in Berkshire Hathaway. That is despite the company never having paid a dividend. For most of its history Berkshire has found opportunities to reinvest profits within its businesses, by buying new businesses, by buying company shares or by buying shares in Berkshire itself. Unusually, with such a strong history of excellent capital allocation, Berkshire’s management are afforded the opportunity to retain a lot of cash in the belief that they will make best use of it when opportunities present themselves. That was the case during the financial crisis and may well be the case again during this period of economic stress.

Pragmatic or well-structured policies on distribution can be indicative of a good company with a good business model, strategy and even culture. Sensible capital allocation is also observed among cyclical companies that recognise the risks and uncertainties associated with their industries. Such companies usually employ flexible dividend policies and operate with significant operational and financial buffers. Housebuilder Berkeley Group scores well on that front.

Mining companies have attempted to craft stable and growing dividends from commodity prices which are inherently volatile. They abandoned predictable dividends in favour of policies that pay out a stable percentage of potentially volatile profits. There is no question that this does increase the short-term volatility of income, but it reduces the risk of income appearing stable, only to collapse precipitously due to prevailing economic conditions.

Admiral has been one of the best dividend-paying companies in recent years. It incorporates a variable element to its pay-out. Admiral’s competitive advantage enables it to run the business with very little capital which means it can distribute almost all its profits. It does this through a growing regular dividend and frequent special dividends. The special dividends are, themselves, pretty regular, but its most recent special was delayed in April at the behest of the regulator. The attraction of Admiral to an investor wanting dividends (apart from the quality of the business) is that the interests of investors and the company are aligned. Admiral distributes profits it does not need to reinvest, and the investor provides capital upon which they need an income return.

These are all examples of great managers who inspire trust in their investors.

How best to respond?

With the shock that the global economy is undergoing currently, there will, at the very least, be a temporary pause or reduction in many dividends.

For those shareholders who have the luxury of choice, taking more of a total return approach rather than an income approach may well be in their long-term interests. It may also benefit the companies they invest in, and society at large.

For those reliant upon the returns from their portfolio to meet expenses there are some points worth discussing with your adviser. Neither the capital returns, nor the income returns, from equities are immune to volatility, as this recent period has re-emphasised. Selling stocks at low prices can have lasting implications for a portfolio. Hence, one of the greatest luxuries we can be afforded as an investor is the choice of when to raise money from a portfolio. That can be ensured by keeping a pool of cash to meet expenses should now be a judicious time to draw from the portfolio.

The research team and our investment managers are, as ever, working to establish which companies are managing their distributions sensibly and in the best long-term interests of shareholders.

Should we need to weather other financial shocks, it is likely that companies with the most pragmatic and well-considered approach to managing all aspects of their business will be the ones whose returns can deliver our long-term financial objectives.

These articles from Brewin Dolphin provide their view of the markets and potential investment strategies given the current market climate.

Dividends are an important consideration for both fund managers and investors. Different dividend strategies will need to be applied as markets adapt during and following this crisis

Paul Green

09/06/2020

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AJ Bell Update – Are we through the worst of the crisis?

Please see the below update received by AJ Bell yesterday afternoon (04/05/2020).

Are we through the worst of the crisis?

May’s industrial surveys show a recovery from April’s record lows.

While it’s too early to say the economic recovery is under way, it’s possible we have seen the worst readings in terms of industrial confidence in Europe and Asia.

This week analytics and information firm IHS Markit published its widely-followed industrial purchasing managers index (PMI) surveys for China, Japan, the UK and several European companies, as well as the composite index for the Eurozone.

Mostly Rising

The reading for China, which entered the coronavirus crisis first and after locking down its economy almost overnight has been able to re-start activity faster than most, showed the quickest rate of recovery in manufacturing for nine years.

After a record fall to 40 in February, the manufacturing PMI rose to 50.7 in May, signalling that the sector is once again expanding (a reading above 50 means expansion, below 50 means contraction).

The UK PMI survey registered a rebound from April’s record low of 32.6 to 40.7, still below the key 50 level and the seventh lowest level in the survey’s history, but as IHS Markit Director Ron Dobson observed, ‘the rate of contraction has eased considerably since April, meaning the worst of the production downturn may be behind us’.

Surveys in France and Germany showed a similar recovery, from 31.5 and 34.5 in April to 40.6 and 36.8 respectively, although in France demand continued to decline in May while in Germany employment levels fell further, impacting the overall reading.

Japan was the only major economy to see a continued decline, with May’s reading of 38.4 the lowest since the end of the global financial crisis in March 2009. Meanwhile the preliminary US reading for May was 39.8 against 36.1 in April, although with concerns resurfacing over a trade war with China the reading could struggle in coming months.

An Uphill Battle

As far as the UK goes, while there is scope for optimism we need to be realistic. Output, new orders and employment fall at some of the fastest rates in the survey’s 28 year history. New orders and export orders for consumer, intermediate and investment goods were particularly weak.

Some companies expect output to rise over the next 12 months, and some have seen new orders since clients started to reopen their businesses, but it is patchy. Also inflation is rising due to supply chain disruptions, although part of this was passed on.

Finally the threat of a ‘no deal’ Brexit can’t be dismissed. We may have seen the worst of the indicators for the time being, but it could be a very long, drawn-out recovery.

As you can see from this blog and our other recent posts, the signs are pointing to a recovery, but this recovery may take time, and we are not in the clear yet, the volatility will continue.

Keep your eye out here for our regular market commentary and updates.

Andrew Lloyd

05/06/2020

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Brewin Dolphin: Markets in a Minute ‘Climbing the wall of worry’ 02/06/2020

Please see the below weekly market commentary update from Brewin Dolphin received yesterday (2nd June 2020):

Markets

Share markets had a positive week with most assets rising despite increasing political tensions between the US and China over Beijing’s imposition of security laws in Hong Kong.

There were widespread demonstrations in the city and markets were cautious ahead of President Trump’s speech on Friday in which he would outline his response. However, there was a collective sigh of relief when his speech, which took place after the UK and European markets had closed, lacked any threat of direct action against China or any intention to pull out of Phase 1 of the trade deal.

As a result, US markets closed effectively flat on Friday and UK and global markets rallied on Monday, having lost ground ahead of his speech last Friday. But the best gains were seen in Asia.

• Hong Kong’s Hang Seng closed up by 3.36% yesterday.

• Overall, the MSCI Asia ex-Japan index jumped 2.27% on Monday alone.

• Indices in Europe, the US and UK all finished higher yesterday; the FTSE100 gained 1.5%.

Last week’s gains: *

• FTSE100: 1.4%

• Dow Jones: 3.75%

• S&P500: 3%

• Dax: 4.6%

• Nikkei: 3.7%

• Hang Seng: 1.5%

 • Shanghai Composite: 1.4%

*Data to close on Monday 1 June 2020

“The speed at which the economy is able to open over the next two months will be an important factor determining the trajectory of unemployment thereafter.”

PMIs signal slow improvement

Two surveys over the weekend suggested China’s recovery was continuing, with manufacturing activity expanding.

• China’s National Bureau of Statistics manufacturing PMI hit 50.6 in May, slightly down on April but above the key 50 level that indicates expansion.

• The private Caixin/Markit manufacturing PMI came in at 50.7 for May, above expectations of 49.6. • In the UK, the IHS Markit/CIPS Manufacturing PMI came in at 40.7, still firmly in contraction territory but sharply up from April’s reading of 32.6, suggesting the easing of the lockdown is stemming the decline in activity.

• Eurozone manufacturers appear to have passed their nadir, with the region’s manufacturing PMI rising to 39.4 in May from 33.4 in April.

PMI Data June 2020

Source: Datastream June 2020

Stimulus news

Chancellor Rishi Sunak confirmed on Friday that the furlough scheme will be gradually unwound. Starting from August, firms will have to pay employer national insurance and pension contributions for furloughed staff. In September, they will have to pay 10% of their wages, rising to 20% in October.

This comes despite plenty of lobbying for less burden on business. The Institute of Directors said only around half of firms can afford this. The speed at which the economy is able to open over the next two months will be an important factor determining the trajectory of unemployment thereafter. However, companies will be able to bring back staff on a part-time basis from 1 July, a month ahead of schedule, giving companies some flexibility in adapting to the new levels of demand.

Sunak also extended the Treasury’s self-employment income support scheme, so that those eligible would be able to claim another payment, albeit to a lower level of 70% of average monthly earnings. The first payments had been based on a ratio of 80%. Welcome news nonetheless.

Boost for Europe

The European Commission has proposed a €750bn package, dubbed “Next Generation EU”. The fund would consist of €500bn in grants to hard-hit member states which would not have to be repaid, with a further €250bn in loans. This follows a proposal from France and Germany of €500bn, which the EU’s so-called “Frugal Four” (Austria, Denmark, the Netherlands and Sweden) countered with a proposal of loans only. Since any proposal requires agreement from all 27 member states, we would not be surprised to see them meet somewhere in the middle.

Virus optimism

The general sense within the market seems to be that the worst of the virus is over and the re-opening of the economy will proceed. There are varying degrees of caution over the process which makes it hard to draw conclusions about how well it will go.

Asia is an example of how well the virus can be contained. As we expected, privacy concerns are causing resistance to the track and tracing amongst western populations, and the lack of an effective app means any track and trace programme will be limited in its effectiveness.

As the crisis appears to be ebbing and the UK government is loosening restrictions further, support for containment measures is starting to decline. Indeed, police have said that the lockdown is no longer enforceable, and scenes from parks around the country this past sunny weekend have shown crowds clearly breaching social distancing regulations.

So far, however, there have been very limited instances of cases starting to rise as a result of lifting lockdowns, although it is early days. Denmark remains on a downward trajectory despite lifting its lockdown early, as does Sweden despite much less strict suppression measures. The exceptions are largely in the US where, although the overall trend is lower, several states are seeing an upward trend including California. In Europe it is probably the more general persistence of cases in Italy, where lockdowns are being lifted, that is of greatest concern.

But convincing evidence of a second wave is lacking, which is good news, but there is no room for complacency. 

Vaccine progress

Stories regarding vaccines continue to support investor sentiment despite the challenges of producing these to a scale which would facilitate global herd immunity. However, a variant of these stories relating to GlaxoSmithkline was that the company plans to produce a billion doses of adjuvant. This can boost the effectiveness of a vaccine, reducing the quantity, improving the response and creating longer lasting immunity. With so many vaccines in early trials, we await news of concrete developments.

These weekly updates from Brewin Dolphin provide their view of the markets, the frequency of these reports is particularly useful given the present high levels of volatility.

We try to take on board a wide variety of fund managers’ and investment experts’ opinions such as Brewin Dolphin to give you an informed and overall view of the current climate we are in, the consensus view and any variation in views.

Paul Green

03/06/2020

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Brooks Macdonald Weekly Market Update: All eyes on the European Central Bank

Please see the below weekly market commentary update from Brooks Macdonald received yesterday (1st June 2020):

All eyes on the European Central Bank

  • Donald Trump’s press conference relieved markets by steering clear of a re-escalation of tariffs
  • The European Central Bank (ECB) will consider expanding their quantitative easing programme this week
  • However, this may reduce the perceived urgency of an EU recovery fund

Markets continued their strong run last week as economies reopen, stimulus is on the agenda and economic data picks up from its COVID-19 lows.

Donald Trump’s press conference relieved markets by steering clear of a re-escalation of tariff

On Friday, Donald Trump held a press conference to announce that Hong Kong would lose its special trading rights with the US. He added that Chinese and Hong Kong officials would be subject to sanctions in relation to their actions in eroding Hong Kong’s autonomy. Nonetheless, markets rallied. The view is very much that Donald Trump held back compared to what actions he could have taken with no re-escalation in tariffs or talk of withdrawing from the Phase One deal. Investors have taken this is a hopeful indication that the US President wishes to avoid the financial and economic ramifications of a step up in trade tensions.

The European Central Bank (ECB) will consider expanding their quantitative easing programme this week

The main event this week is likely to be the ECB meeting. Markets will be watching this closely to see whether there is talk of extending the pandemic quantitative easing (QE) programme, or any reference to the German Constitutional Court decision. Given the lack of agreement around an EU recovery fund, ECB officials will be pondering whether they need to step in to keep peripheral bond spreads under control. Italian spreads rallied when the Merkel/Macron plan was unveiled but given that agreement on the EU fiscal package seems unlikely to arrive imminently the central bank will be cautious of a retrenchment.

However, this may reduce the perceived urgency of an EU recovery fund

There has been a significant debate about the efficacy of QE in the post financial crisis world. Critics say that the depression of funding costs tends to raise asset prices more than it helps the real economy. While the markets would undoubtedly appreciate the pandemic programme being expanded in size and duration, the read across to a boost in economic growth is not clear. The EU recovery fund talks continue in the background, but if there is a perception that the ECB has already done ‘enough’ by expanding their purchase programme, talks could falter. Herein lies the risk to the broader economic stability of Europe, a fiscal response could fail to materialise and the ECB covers the cracks by suppressing bond yields. This will simply ensure the divide within Europe just grows below the surface and will pose an even greater risk during the next crisis.

Another useful commentary into the market activity last week. The markets have had a rally over the last week and into this week. We do expect the volatility to continue and further drops could be around the corner as global economies continue to recover and fight against Covid-19. These commentaries from a range of fund managers help add context to the daily market fluctuations.

Andrew Lloyd

02/06/2020

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AJ Bell – Investment Blog

Please see below an investment article from Russ Mould – Investment Director at AJ Bell. This was posted on Friday, 29th May 2020.

What to do as companies dash for cash

April gave equity markets a taste of corporates’ need for cash, as listed firms tapped shareholders for £3.3 billion in March – according to London Stock Exchange data – but Compass and Whitbread moving to raise £3 billion between them in the space of a few days in late May takes the figures to a different level, as firms continue to adjust to what the viral outbreak and lockdown mean for their business. The question now is whether the likely rash of fund raisings is a threat, an opportunity or something in between for the fund managers to whom advisers and clients have entrusted their own money and UK equity exposure.

The London market has been relatively quiet so far in 2020. London Stock Exchange data shows that new flotations had raised barely £500 million by the end of April, the slowest start to a year since 2009, while secondary deals by firms that were already listed had generated some £5.6 billion.

2020 has been very quiet for new listings in the UK

Source: London Stock Exchange

Famous five

“Compass and Whitbread’s fund raisings made them the fourth and fifth FTSE 100 firms respectively to raise fresh equity this year, after Auto Trader, Carnival and Informa, and the scale of their deals suggests that the pace is about to pick up markedly across the UK equity market as a whole.”

Compass and Whitbread’s fund raisings made them the fourth and fifth FTSE 100 firms respectively to raise fresh equity this year, after Auto Trader, Carnival and Informa, and the scale of their deals suggests that the pace is about to pick up markedly across the UK equity market as a whole.

The experiences of the London market after the 2000–03 and 2007–09 recessions and bear markets would suggest that new listing activity may stay quiet, as reduced risk appetite and lower equity valuations deter would-be buyers and would-be sellers alike. The historic data does, however, show much greater activity among firms that were already listed in the wake of the bear markets and recessions, as they focused upon balance sheet repair or raising capital so they could take advantage of investment or acquisitive opportunities that arose during the downturns and emerge all the stronger – financially and strategically.

Secondary listings proliferated during the last economic and market downturn

Source: London Stock Exchange. Shows full-year figures. *2020 to the end of April

“Outside the Big Five banks, FTSE 100 total net debt (excluding pension deficits and lease liabilities) has soared by three quarters since the Global Financial Crisis ended.”

It therefore seems logical to expect that Carnival, Informa, Auto Trader, Compass and Whitbread will be followed by others, especially if the world emerges from lockdown only slowly and the economic upturn proves gradual. Outside the Big Five banks, FTSE 100 total net debt (excluding pension deficits and lease liabilities) has soared by three quarters since the Global Financial Crisis ended.

FTSE 100 aggregate debt has soared since 2009

Source: Bloomberg. *Excludes the Big Five banks.

Dash for cash

Cutting dividend payments by some £24.8 billion for 2019 and 2020 – so far at least – is preserving some cash and cost cuts, and Government support schemes will also be helping, but many firms may be reluctant to take on fresh debt in their attempts to manage their way through the viral outbreak. Even allowing for record-low interest rates and central banks’ efforts to manipulate bond yields and compress credit spreads to make it cheaper for companies to borrow, many management teams may already feel they have enough borrowing on their balance sheet, especially given the uncertainty over future revenues, let alone profits and cash flow.

“The trend toward de-equitisation, as companies worship at the altar of the cash-light, ‘efficient’ balance sheet and buybacks outpace fund raisings, could therefore come to an end.”

The trend toward de-equitisation, as companies worship at the altar of the cash-light, ‘efficient’ balance sheet and buybacks outpace fund raisings, could therefore come to an end. Data from Bloomberg shows how the current crop of FTSE 100 firms has returned more cash to shareholders via buybacks than it has raised from them on eight occasions in the ten years since the end of the financial crises and cash-raising boom of 2009. Firms may therefore begin to favour cash buffers instead.

Buybacks have consistently outpaced fund raisings in the past decade

Source: Bloomberg, based on current crop of FTSE 100 constituents

UK equity fund managers can therefore expect more calls upon them, especially as Compass and Whitbread may well open the floodgates, just as more firms were emboldened to cut their dividends as growing numbers of boards offered the unkindest cut of all.

Selective approach

“Whether any switch from net buybacks to net issuance actually holds back share prices and headline indices is harder to divine but substantial equity issuance did not hold back the FTSE during the economic upturn and bull market of 2003–07 or the early stages of the recovery from the financial crisis.”

Whether any switch from net buybacks to net issuance actually holds back share prices and headline indices is harder to divine. In theory, buybacks have been a big source of support for share valuations over the past few years, especially as companies have frequently been gormlessly price-insensitive buyers.

However, substantial equity issuance did not hold back the FTSE during the economic upturn and bull market of 2003–07 or during the early stages of the recovery from the financial crisis. As central banks pump out Quantitative Easing and interest rates remain anchored near zero, cash is still looking for a home and investors are still seeking out the best risk-adjusted returns that they can find.

As a result, fund managers may view rights issues or placings as a good chance to average down and top-up holdings or build new positions in firms – providing they have some liquidity to hand themselves. Those firms that are blessed with a strong competitive position and management acumen, and which have simply been blindsided by an impossible-to-predict plunge in revenues thanks to the outbreak, may well merit support from money managers. Those trying to patch-fix prior strategic or financial errors may not. But, if nothing else, lower debt means less risk and less risk can mean higher equity valuations over time, all other things being equal.

Russ has a different view on markets given his former experience as Technology Correspondent and Editor of Shares Magazine.

Please continue referring to our blog content for the latest market updates.

Carl Mitchell – Dip PFS

IFA & Paraplanner

01/06/2020

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Prudential PruFund Funds Expected Growth Rate and Unit Price Adjustments Further Information

On 26/05/2020 Prudential announced Expected Growth Rate reductions on their smoothed funds and upward Unit Price Adjustments on some of their PruFund range smoothed funds.

Following these changes, I thought you would like more information and to keep it fairly straight forward I’ll focus on the key smoothed fund, PruFund Growth.

On PruFund Growth Prudential have announced an Expected Growth Rate reduction of 0.20% per annum down from 5.90% to 5.70% on pension, ISA and International Prudence Bond investments.

At the same time, while some of the other smoothed funds have benefited from an upwards Unit Price Adjustment (increase in fund value) PruFund Growth funds did not.

Why is this?

On the Expected Growth Rate (EGR)

  • The EGR is an estimate of the expected investment return over the long-term, at least 15 years
  • Prudential’s in-house stochastic asset model is used to generate a distribution of possible future investment returns (having regard to the current asset mix in each fund) over a 15 year period
  • It is preferable not to make frequent changes due to the long-term perspective

As a business we (P and B IFA) have flagged up for a while now that we expect lower investment returns for longer.  This is not a surprise as some of the key assets are producing far lower returns, cash interest rates and Government Bonds and other Fixed Interest assets.

To counter some of the lower returns Prudential have recently increased their equity content following a Strategic Asset Allocation review as noted in an earlier blog.

On the Unit Price Adjustment (UPA)

Why did the UPA not increase on PruFund Growth?  Timing was a key point.  The UPA down was applied to PruFund Growth on 17/03/2020.  For a few days after this UPA markets continued to fall.  Other ‘smoothed funds’ had their UPA a few days later, nearer the bottom for markets.

As a result, the PruFund Growth fund had further to grow back to hit the target to achieve an upwards UPA now.  The ‘smoothing’ limit for PruFund Growth is 5%, PruFund Cautious (with lower long-term returns) has a ‘smoothing’ limit of 4%.

PruFund Growth as a fund is now in a good position to either benefit from further increases in asset values or a good position should markets fall again.  Near the top of the ‘smoothing’ range without triggering a UPA.

Key Points

  • The smoothing process within PruFund is formulaic and non-discretionary
  • All versions of PruFund are operating as expected given investment market conditions
  • Where a particular version of PruFund has not yet had a positive UPA in 2020, the process should result in the fund being well positioned for any further recovery in markets

Summary

We have hit a bout of short-term volatility and although volatility has subsided a little now there is still plenty of risk in markets.  However, as long-term investors we just need to be patient and remain invested.  Markets will recover given time and so will your invested assets.

It’s also a good time to contribute to pensions and investments as asset prices are low now when compared to recent prices.  Both lump sums and regular monthly contributions will benefit you over the medium to long term.

I’ve been reviewing PruFund Growth since Prudential launched it as an investment fund in 2004.  It was interesting to see how this fund dealt with the Global Financial Crisis, stepped down in value and then stepped back up in value through a series of downwards and then upwards UPAs.  The fund worked and smoothed out a lot of volatility.

It has also delivered good average investment returns over the long term for it’s risk profile, 5/10 ‘Low Medium Risk’.

Steve Speed

28/05/2020

Useful links:

PruFund Blog 26/05/2020:     https://www.pandbifa.co.uk/prudential-prufund-growth-update/

Prudential Guide to Smoothing:                https://www.pruadviser.co.uk/pdf/PRUF1098101.pdf

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Brewin Dolphin – Markets in a Minute Update 26/05/2020

Please see this weeks ‘Markets in a Minute Update’ from Brewin Dolphin:

Markets

Global shares mostly rallied last week on hopes of a vaccine and continued lifting of lockdowns. In the UK, the FTSE100 nudged through the 6,000 mark for the first time in three weeks, before falling back on Friday as tensions between the US and China flared up once again.

Last week’s gains*
• FTSE100: 3.4%
• Dow Jones: 1.7%
• S&P500: 1.44%
• Dax: 3.65%
• Nikkei: 1.44%
• Hang Seng: -3.4%
• Shanghai Composite: -2%

Most markets in Asia closed up yesterday and were heading up today – even Hong Kong where the Hang Seng closed up by 1% on Monday. In early trade on Tuesday, most global markets were making solid gains due to optimism caused by more easing of lockdowns.

*Data to close on Friday May 22

US/China tensions

Last week China proposed the imposition of national security laws from Beijing in the special administrative region of Hong Kong, restricting freedoms of speech and the press. This move has increased worries about threats to democracy in Hong Kong that had formerly only really been subdued by the onset of social distancing. This has caused protests from the US and threats of retaliation, as well as public protests in Hong Kong by pro-democracy demonstrators. The Hang Seng, fell last week as a result. China will vote on the proposed legislation on May 28.

Trump has promised retaliation

President Trump said he would respond very strongly to what he sees as an assault on democracy in Hong Kong. He is most likely to consider tariffs, although he will be mindful of whether that is in his interests ahead of the US election in November. One conciliatory note from Premier Li Keqiang was a continued commitment to the phase one trade deal reached last year, but we are sceptical that China can really abide by its terms.

Even so, most Asian markets rose yesterday, with the best gains in Japan, as expectations increased that the nationwide state of emergency will soon be lifted.

Stimulus news

UK
The Bank of England has raised the prospect of negative interest rates for the first time. It has said the policy is under “active review”.

Bank of England MPC member Sylvana Tenreyro was probably the most outspoken of a number of MPC members, who coalesced around the position that negative interest rates could be considered in the UK. Tenreyro cited Europe’s experience with negative rates as demonstrating that they have a powerful effect on real activity, but nobody outside the MPC seems to agree. However, with Governor Andrew Bailey and Chief Economist Andy Haldane insisting that negative rates could be considered, we have to take them at their word, although market pricing reflects only a slim chance that negative rates could be introduced in 2021.

China
Premier Li Keqiang also suspended China’s growth target to facilitate a shift towards job creation as a priority. China’s GDP target had low credibility anyway, with the eventual GDP report assumed by all to be massaged to fit with the target rather than the other way around.

Europe
Stimulus news in Europe was more positive, albeit only tentatively. Progress on a €500bn aid package crept forwards as Germany reached an agreement with France that the aid could take the form of grants, funded by debt and secured on the EU budget. To finally ratify such an approach will need the consent of all members and it is expected to meet resistance from other northern European states.

Economic activity may have bottomed

Backwards looking data continues to paint a bleak picture. The UK claimant data last Monday showed the number of people claiming unemployment benefit jumped by 856,000 in April, to a total of 2.1m, according to the Office for National Statistics (ONS). This implies a jump to circa 6% unemployment when April’s official rate is released. Friday’s retail sales data indicate a decline of more than 18% in April compared to March, taking us back to activity levels last seen fifteen years ago (over which time the population has grown by about 10% or 6 million people).

However, more current “high frequency” data, such as energy consumption, road traffic etc, shows activity levels are improving. Therefore, we can take heart from the fact that we are at the nadir for economic activity and the path ahead is very likely one towards recovery from here.

Capital and income from it is at risk.
Neither simulated nor actual past performance are reliable indicators of future performance.
Performance is quoted before charges which will reduce illustrated performance.
Investment values may increase or decrease as a result of currency fluctuations.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

These updates from Brewin Dolphin provide a good weekly ‘snapshot’ look at the markets which is useful given the current volatility we are currently experiencing.

We try to capture a wide range of fund managers and investment experts opinions such as Brewin Dolphin to give you an overall consensus view of the current climate we are in.

Andrew Lloyd

27/05/2020

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Prudential PruFund Growth update

Last Thursday afternoon (21/05/2020) we had an update from Parit Jakhria of Prudential’s Treasury & Investment Office (TIO).  Parit is the Director for Long Term Investment Strategy at the TIO and his role is to lay out the long-term investment views and select assets for the multi asset fund at Prudential that includes PruFund Growth and With Profits funds.  The assets managed by Parit and the TIO value at circa £170 billion.

In an investment context, long term is 10 years plus.  I often hear about the TIO focusing on 15 years.  Short term is 0 to 5 years and medium term is 5 to 10 years.  One of the benefits of the scale of Prudential’s Multi Asset funds is that they can afford to invest with a long-term focus and not be concerned with liquidity issues.  Buying illiquid assets can help generate higher returns.

Parit commented that we have had 2 to 3 decades of globalisation and now this may decline slightly, and we could move more towards regional blocks, Europe (inc. UK), US, Asia etc.  This means that it’s more important to remain globally diversified.

Prudential’s TIO follow this process for investing:

  1. Capital markets assumptions
  2. Capital market modelling
  3. Portfolio construction
  4. Strategic asset allocation

This process is really useful in uncertain times.  The TIO look at a whole range of potential scenarios and on that basis, they are relatively positive.  The modelling is done on Prudential’s own unique inhouse system GeneSIS.

How are the TIO investing?

Their equity investment overall has increased with additional investment in the UK, Asia, Japan, Global Emerging Markets, China and a new investment in India.  Fixed Interest has seen a reduction overall.  They invested in African and Asian debt and now have a new Emerging Market debt allocation too.

Summary

I was awaiting written information from Prudential confirming their thoughts as outlined on Thursday afternoon, but they tend to be a little slower in issuing a written market briefing.

From my point of view the long-term asset allocation is positive and it’s good to see it when you have spent c 16 years looking at the strength and depth of their multi asset research that they are investing for growth over the long term.

Please note that this does not mean that the short-term volatility is over.  We may still experience further bouts of short-term volatility as we deal with the virus and try and get the economy working properly again.  Other news flow will impact on markets too, US/China, Brexit Trade Deals and US politics for example.

Please note that the above is based on my notes and interpretation of what Prudential said and can not be relied on.  Investments can (and obviously do) go up and down in value.

One of the key messages we hear repeatedly is to remain invested.  This is important.

Steve Speed

26/05/2020

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Quilter Investors – EU Update

Please see below an EU article published by Quilter Investors yesterday (21/05/2020):

EU plans €1trn coronavirus recovery package 

The European Commission has revealed it will outline a bold recovery plan to tackle the consequences of the coronavirus pandemic, which could exceed €1trn in the form of grants and loans to hard hit regions.

It followed France and Germany’s initial proposal on Monday (18 May) of a €500bn recovery fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.

However, on Tuesday (19 May) executive vice president of the European Commission, Valdis Dombrovskis, said the EU aimed to be bolder, with an ambition to increase financing by a figure exceeding €1trn. The resulting loans and grants would be linked to economic policies and structural reforms.

The plans for the EU’s ‘recovery  instrument’, which are expected to be unveiled next Wednesday (27 May), would be closely linked to the EU’s budget plans and is likely to include the creation of a recovery and resilience facility, which will concentrate on investments and structural reforms, said Dombrovskis.

The initial proposal from France and  Germany signalled a step change in  the eurozone’s attitude to sharing debt, by providing grants to harder hit regions, such as Italy and Spain, with the proposals pushing government bond  yields from southern European countries lower, and the euro higher.

CJ Cowan, assistant portfolio manager at Quilter Investors, says: “The suggestion of grants rather than just loans is a positive but this is still some way from the sort of debt mutualisation often argued for by economists. The conditionality attached to access the funding will be a sticking point between northern and southern European states as well, but this is a notable step in the right direction and lessens the risk of a dramatic adverse move in Italian and Spanish government bond markets in the near term.”

As our nearest trading block it will be interesting to see how this one plays out.  It looks like the EU want to stand together when it suits them and be independent when they want.  Watch this space!

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

22/05/2020

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Market Update

Market Update – 21/05/2020

Over the last few days, I’ve been listening to the following Fund Managers for their input on investments and their views on markets:

  • BlackRock
  • J.P. Morgan
  • Schroders
  • Invesco
  • Prudential

In addition I’ve been listening to Curtis Banks on pension technical issues and the Federation of Small Business to hear Liz Truss in her position of MP, Secretary of State for International Trade and her views on where we are up to in the UK and with ongoing trade negotiations.

This research is on top of standard client advice work, I’ve not quite moved into the office, but it feels like I have sometimes!

Why do I do this level of research?  I want to get the consensus view on the global macro situation in the markets from the experts.  Fund Managers have substantial resource and spend a small fortune on research.

Whilst it is not an exact science and at the moment there are a lot of moving parts to take into account, I would say the general view is of cautious optimism.  Most Fund Managers are positioning for growth over the long term and for some Fund Managers for growth over the short term too based on modelling of scenarios and probable outcomes.

Markets are generally probably slightly too high as they tend to look through the very short term and focus on the (post virus?) future.

The risks are many and varied, the biggest one is a bad second wave of the coronavirus.  In addition, we have the US/China situation, Brexit trade deals (no deal Brexit?), Europe and US politics to name a few.

Consensus varies on where to invest if you have the freedom to choose but again common areas that appear good value now are Asia and Emerging Markets if you can take the volatility and associated risks.  As part of a portfolio or fund that is actively managed you get this allocation and the risks managed for you to some extent.

What next?

In summary you need to remain invested as you are for now, it is still too volatile to make fund switches.  If you have spare cash it is also a good time to invest, asset values are still low compared to valuations earlier this year.  You can try and buy into the dips, but this can be difficult to time.  Over the medium (5 years plus) to long term (10 years plus) you will see growth without perfect timing.

Paying regular monthly premiums into either pensions or investments is a good idea too.  If you can afford to increase your regular monthly contributions, please do.  This is a lot easier than trying to buy into the dips with a lump sum investment.  You may, if you are lucky, have spare cash with your reduced holiday and leisure spend!

Steve Speed

21/05/2020