News

Input from Jupiter’s Fund Manager Amanda Sillars received yesterday (15/04/2020) below as she outlines the four prominent themes in the market today:

Amanda Sillars

Fund Manager, Independent Funds

Quality and technology reign supreme in markets

Four prominent themes have emerged over the last few weeks, said Amanda Sillars, Fund Manager, Independent Funds: reduced dividends, exceptional innovation, and the supremacy of quality and technology stocks.

The first two themes are new. Firstly, it has been reported that over 40% of UK companies so far have ditched their dividends. On a more positive note, the second new theme is the exceptional innovation that is being unleashed in response to the crisis, particularly within the pharmaceutical, medical, monitoring and testing sectors.

The two other themes existed before the coronavirus, but have been supercharged as a result. The supremacy of quality has now gained even more momentum as fund managers unpick the balance sheets of companies they own and stress test for low or no earnings for Q1 and Q2. Many managers have sold weak companies and added to existing quality holdings: companies that are leaders in their fields, with strong balance sheets and long-term, responsible management. Owning quality stocks is seen as essential for survival: the strong companies are getting stronger, seizing new opportunities and investing while their competitors are struggling.

The final supercharged theme is technology, which has been described as the new defensive sector. The shift from physical to digital has accelerated at supersonic speed and is one of the primary outcomes of the global lockdown.

While a return to pre-coronavirus economic activity may well be several years, not several quarters, away Amanda believes that truly active, forensic fund managers can capture the huge opportunities emerging through these extraordinary changes and can identify the best companies, to the benefit of their clients.

For the right Fund Managers, they can see opportunity and select the right kind of stocks not just to survive but that will thrive in the current market.

Carl Mitchell

16/04/2020

Invesco give a good overview of markets in their weekly Performance Update issued today (14/04/2020) below:

With the early stages of a severe winter hitting the global economy, financial markets have decided it’s spring, preferring to focus on the green shoots of further central bank (particularly from the Federal Reserve) and government support (the EU finally came up with a €500bn package), as well as occasional snippets of good news on the coronavirus front. Consequently it was very much risk-on last week with some significant upward moves in both equity and credit markets.

Global equities had their strongest week (+10%) since 2008, but the real standout in Developed Markets was the performance of the FTSE 250 (UK Midcaps), which rose 16.3%, the biggest weekly gain since index data became available (1986). Global small caps had a record week too (+14%). Strong equity markets translated into declining volatility, although the VIX index (1m implied volatility of S&P 500) at 42 still remains at very elevated levels (it was at 14 when the S&P peaked on 19 Feb). In credit markets, HY, and US HY in particular, was boosted by the Federal Reserve expanding its asset purchase to include HY ETFs.

Market performance last week (%)

Past performance is not a guide to future returns. Sources: Datastream as at 13 April 2020. See important information for details of the indices used.¹

Key observations on last week’s performance:

• Global equities rose sharply as highlighted earlier. DM (+10.6%) delivered almost double the return of EM (+5.8%) as US equities were particularly strong (+12.2%). A similar picture was seen in small caps (DM +14.7%, EM +7.5%). UK equities were also robust with the All Share having its best week’s performance since 2008, led by mid and small caps.
• At a sector level, risk-on invariably means that the more cyclical / value areas of the market outperform and last week was no exception. Financials, Consumer Discretionary and Materials were strong performers, while Consumer Staples and Communication Services were the main laggards. Exceptions to the rule were the defensive Utilities sector on the upside and Energy on the downside, although the latter probably exceeded expectations given the decline in the oil price. At a factor level there was little difference between Growth and Value, with the latter winning out marginally. Momentum and defensives were the weakest sectors.
• Developed Market government bond returns generally weakened at the margin on the back of a small uptick in yields, with the 10yr UST and Bund both rising 13bp. The 10yr Gilt yield was unchanged at 0.31%. EM sovereign bonds were the best performer, with yields falling 23bp.
• Global credit markets had a good week, particularly High Yield. Yields and spreads fell across the board, -30bp and -38bp respectively for IG and a more substantial -105bp and -122bp for HY. The lower the credit rating the better, with BBBs the best performer in IG and CCCs and below in HY. US credit outperformed on the back of Federal Reserve support.
• The risk-on backdrop weighed on the US$ with £, the Euro and EM currencies all appreciating versus the US$.
• Despite the OPEC+ agreement to cut oil production by 10mbd, along with additional support measures from the G20, making it overall the largest oil supply agreement in history, that was not seen as enough to offset the dramatic collapse in global demand. Consequently Brent fell -7.3% to just below $32. Copper, on the other hand, benefitted from the more optimistic tone in markets and the weaker US$. Gold too was strong, a beneficiary of a weaker US$, and at $1682 is at its highest level since early 2013.

YTD market performance and YTD low (%)

Past performance is not a guide to future returns. Sources: Datastream as at 13 April 2020. See important information for details of the indices used.¹

This week you will note that I have shown the maximum YTD drawdown as well. This is from the start of the year, not the peak to trough decline during the year so far.

Key observations on YTD performance:

• As the chart highlights it’s been a tough start to the year, but almost every asset class is now some way above their YTD lows, which were invariably seen in late March. There have been some significant rallies. The S&P 500 is +24.8% above its lows, the All Share +18.4% and US HY +12.4%.
• In equities EM (Asia best region) have marginally outperformed DM, with little performance differentiation between regions in the latter other than the UK, where the All Share is still down -24.5%. There has been a 10% performance divergence between large caps relative to small caps, a similar picture for Growth versus Value, while defensive sectors are ahead of cyclical ones by just under 5%.
• A fairly mixed bag from government bond markets. USTs have been the star performer with the 10yr UST YTM falling 119bp and returning 13.7%. Gilts have also been strong, with the 10yr down 52pts. EZ performance has been mixed. 10yr Bund yields (-15bp) have performed better than EZ peripheral bonds. The 10yr Italian BTP, for example, has seen yields rise +17bp. EM external sovereign yields have risen a massive 172bp, pushing returns down – 11.5% YTD.
• Despite the recent rally, credit markets remain firmly in negative territory. Global yields and spreads have widened dramatically (Yields IG +53bp HY +311bp, Spreads IG +144bp, HY +459bp). IG has outperformed HY materially. US and £ credit outperformed in IG, £ and Euro in HY. The weaker the credit rating the weaker the relative performance in both IG and HY.
• £ (-5.4%) and EM currencies (-13.4%) have been the main losers against the US$. Yen remains broadly unchanged, with the Euro slightly weaker.
• The oil price has halved (-51.8%). Economically sensitive Copper has also been very weak. Meanwhile gold (+8.6%) proves to be a robust safe haven.

Chart of the week: UK GfK consumer confidence survey

Source: Datastream as at 13 April 2020.

• GfK normally publishes its UK consumer confidence survey index once a month (at month end), having completed the survey during the first two weeks of the month.
• Last week they published a special flash survey, conducted in the last two weeks of March, to capture the impact of new restrictions on British life. It fell from -9 in the initial March survey to -34. This was not quite as low as the trough in the GFC (-40), but in terms of the economic outlook over the next 12m there was a new record low at -56 (GFC low -52).
• With unemployment expected to rise sharply, expectations on personal finances also slumped and are just above their GFC low (-17 vs -18).
• The current headline reading is consistent with household spending falling sharply. Last week’s car registrations give a foretaste of this. They are usually high in March due to the bi-annual plate change system. They fell 44.4%yoy from 458k in March 2019 to 255k in 2020, the lowest March number since the late 1990s.

Key economic data in the week ahead:

• Another relatively quiet week ahead in terms of economic news flow from the major economies.
• In the US, focus yet again will be on initial jobless claims (Thursday) after a rise of just under 17m in the past 3 weeks. Another “big” week is expected, with consensus at 5m. On Wednesday March’s retail sales will be published, where a record decline is expected. On that day a close eye will also be kept on the Federal Reserve’s Beige Book, a report published eight times per year ahead of the FOMC meeting (next one is 29 April), which provides anecdotal information on current economic conditions. Expect a material deterioration in the outlook.
• The highlight in China is the Q1 GDP report due on Friday. Remarkably for the second largest economy in the world, China manages to produce its final number (there are no revisions) well ahead of even provisional numbers for other major economies (the first reading for the US is not until 29 April). Consensus is for a -11.2%qoq decline and -6%yoy, by far and away the worst quarter ever experienced by the Chinese economy, reflecting the coronavirus lockdown shock. This will also impact trade numbers for March due on Tuesday. All a foretaste of what is to come in Europe and the US.
• A light week for data in the UK. With the BRC Retail Sales number for March (Thursday) we will get a first glimpse of how steep retail sales dropped, while the BoE Credit Condition Surveys on the same day will provide insight into the degree to which banks are ramping up supply of credit, given the expected jump in demand.

As you can see all focus is on the data coming out over the next c two weeks.  We will experience ongoing volatility based on how Covid 19 is progressing/being controlled (how measures are working), the pathway out and the impact on global economies as outlined in the data we receive.

We need to remain invested as we are and be patient.  Ongoing regular monthly contributions into pensions and investments will help over the medium to long term.  Expect heightened volatility.

Steve Speed

14/04/2020

Comment from Brewin Dolphin yesterday (06/04/2020) on long term investing:

The value of long-term investing

Investing for the long term gives your money the greatest chance of growing in value. But this means holding your nerve during periods of significant stock market volatility – and remembering that, as history shows, markets will recover.
Here are four reasons why investing over the long term is the wisest strategy.

1. Staying invested

As the old investment adage goes, it’s time in the market – not timing the market – which is key to returns. By delaying, or cashing in your investments, you risk missing out on the best days in the market.

The global economy has endured plenty of adversity over the decades, and yet the stock market has continued to climb, given time.

Brewin Dolphin have the time and expertise to help you make the most of your investments.

2. Compounding – time is everything

Compounding is extremely powerful when it comes to investing. Albert Einstein apparently described it as the eighth wonder of the world. It is, simply, earning returns on your returns.
For example, somebody earning a 5% return in year one would see their investments grow by a compounded return of 63% after 10 years. After 20 years, this rises to 165%, and over 25 years it balloons to 239%. This demonstrates the cumulative effects that compounding has on capital. £

3. Investing typically beats cash

Savings accounts typically struggle to keep pace with inflation, seeing savers lose value in ‘real’ terms. In the graph below, bills are short dated bonds which give an indication of what returns on cash might have been.

If you are prepared to accept the risk that comes with investing, and have time on your side, you give your wealth the greatest chance of growing and beating inflation over the long term.

4. You benefit from diversification

Our portfolios are well diversified. This means that your investments (and risk) is spread across different assets, across the globe – including equities, bonds and cash.

The value of investments and any income from them can fall and you may get back less than you invested.
Past performance is not a guide to future performance.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
The information above is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

As long term investors we shouldn’t focus on or worry too much about short term volatility. Time in the markets works, trying to time the markets is virtually impossible.

We need to think as long term investors, not traders.

Steve Speed

07/04/2020