We hit a period of extreme volatility last week but we need to remain calm and invested. Please see the input below from one of the investment houses that we use, Brewin Dolphin:
Market update
Managed Portolio Service (MPS)
Over the past few weeks, markets have given us a stark reminder of how quickly they can turn. As the impact of the coronavirus in China became apparent and it became clear that the harsh containment measures would not keep the disease within the country’s borders, so the financial markets started trying to price a risk with many unknown factors. As a result, volatility spiked up and markets fell startlingly quickly. Yesterday we saw the biggest one-day move in UK equity markets since 1987.
Furthermore, Saudi Arabia has declared a price war in the oil market and its timing could not have been more unhelpful. An oil price which was already lower due to concerns about the virus, took a further leg down and fed concerns about the viability of firms that are closely linked to the price of oil. The usual investments that negatively correlate to oil (because it is a major input cost), such as airlines, were having a difficult time for obvious reasons.
Up until Monday, bonds upheld their role as a risk-off asset and have cushioned lower risk portfolios from the worst of the sell-off. Absolute return funds have also held up reasonably well so far.
As long-term investors with Brewin Dolphin will know, we are very wary of reacting to market movements or headlines without having a handle on the wider context. It is all-too easy to panic early and lose the benefit of long-term exposure to the markets. It is easy to forget that, not so long ago, newspapers were concerned by the possibility of war in the middle east after the US targeted a senior Iranian general, but fortunately that did not transpire.
On a personal level it is easy to understand people’s concerns about the virus, but what markets are more concerned about are the effects of the containment and the delaying efforts on the underlying economy.
Brewin Dolphin has sought opinion from over half a dozen virologists, epidemiologists and public health experts to ascertain the implications. There are a wide range of opinions among the experts but there is a consensus that the focus will need to be on delaying the spread. Our asset allocation committee, which normally meets monthly, has already met twice in February to evaluate the situation. Our base case remains that this represents a sharp, but short-lived hit to global GDP although we recognise that there is a danger the situation could then trigger something more systemic.
We are fortunate enough to have some extremely experienced and level-headed investment managers on Brewin Dolphin’s MPS Investment Committee. They recently agreed that it was time to sell down two funds that have proved disappointing in recent months. An absolute return fund has been replaced by Muzinich Global Tactical Credit and BNY Mellon Short Dated High Yield. These are two interesting strategies run by exceptionally skilled managers who are cautiously positioned giving themselves opportunities to take advantage. We also removed a European manager whose value strategy we felt could be replaced more cheaply by a blend of active and passive exposure.
The market movements in February meant that MPS rebalanced a significant amount away from gilts very close to historic highs and bought into equities at lower valuations.
In the sell-off we are once again seeing quality growth outperform on a relative basis. Lindsell Train has therefore done well in the MI Select Managers UK Equity fund, whilst Investec UK Income has performed the same role in the MI Select Managers UK Equity Income fund.
Outlook
The UK equity market produces a healthy dividend currently worth around 5% of current value. Even with the rather tepid growth, if you accept the premise that there will be a return to normality once the impact of the coronavirus fades, then it looks like markets are discounting significant cuts to dividends. In the UK, the convention is to maintain dividends unless your longterm ability to meet them has fundamentally changed, therefore such cuts seems unlikely.
Underpinning UK dividend yields is a large amount of oil and gas profitability. As time passes oil supply should naturally decline and the market will come back into balance in due course with every chance of current dividends being maintained.
There can be no question that the coronavirus is very serious, and the headlines in the UK and the US are liable to get worse before they get better, however it is also the case that we believe it will prove to be a temporary phenomenon and as such should only have a modest lasting impact on financial markets.
As you can see the article suggests that once we are through the coronavirus pandemic the markets should be in a reasonable place with minimal long term impact from coronavirus. I think it’s important that our blog readers continue to see a variety of views from across a range of different Fund Managers.
You will see the consistent messages from different sources.
Steve Speed 16/03/2020
Article courtesy of Brewin Dolphin on 13/03/2020