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Blackfinch Asset Management Monday Market Update

Please see below for Blackfinch Asset Management’s latest market commentary:

In the ever-changing world that we live in, we recognise the importance
of regular and current communication. This weekly news update provides
you with a short summary of events around the world which we
hope you will find useful. 

Issue 2 | 3rd August, 2020


  • Following the introduction of a two-week quarantine for travellers returning from Spain, Boris Johnson announces that further quarantines are being considered with Belgium, Luxembourg and Croatia the next likely candidates.
  • The UK finance ministry extends help to small businesses, announcing that Companies with fewer than 50 employees and a turnover of less than £9mln can now benefit from loans of up to £5mln under the Coronavirus Business Interruption Loan Scheme.
  • Data from Nationwide shows that house prices in the UK rose 1.7% in July.
  • Boris Johnson confirms that the UK needs to slow the reopening of the economy, delaying the reopening of some leisure businesses, as well as imposing restrictions in some areas of the country to counter a rise in infections.


  • Florida and California continue to be the hubs for COVID-19 cases in the US, with both approaching 500,000 total cases, with only 5 countries globally having a higher case number.
  • Republicans and Democrats attempt to come to an agreement over a $1 trillion stimulus plan to help bolster the economy. A variety of steps are being proposed including $1,200 payments to most Americans and further funding for schools, businesses and increased testing.
  • The Federal Reserve leaves interest rates unchanged, as expected. A post-meeting statement confirms that “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”
  • Data shows that the US economy contracted at its fastest pace ever in the second quarter of the year, falling 32.9%.
  • Donald Trump takes to Twitter to propose a delay to the November Presidential election, claiming that postal voting will make the election ‘inaccurate and fraudulent’.


  • The European Central Bank (ECB) has told banks in the Eurozone to cancel dividends until 2021 and to exercise ‘extreme moderation’ with bonuses.
  • The German economy contracts by 10.1% in the second quarter of the year.
  • Data for the Eurozone as a whole shows economic contraction of 12.1% in the quarter.


  • Moderna Therapeutics began the final phase of clinical trials for its COVID-19 vaccine. The US trial, in collaboration with the National Institue of Alergy and Infectious Diseases is reported to involve up to 30,000 people.
  • The UK decides not to join an EU scheme to purchase COVID-19 vaccines, instead forming its own deals.
  • Following news that the UK had secured 90mln doses of the COVID-19 vaccine being developed by Pfizer and BioNTech, a deal worth £500mln was signed to purchase a further 60mln doses from Sanofi. In addition it is expected that Astrazeneca, in conjunction with the University of Oxford, may make 30mln doses available as early as September.

These articles are useful for breaking down market input into sectors. This facilitates an all-round view of the markets from the experts.

Please keep reading these blogs to keep your own view of the markets up to date.

Keep safe and well.

Paul Green


Team No Comments

Active Minds: China’s recovery drives Asian bull market

Please see below for Jupiter Asset management’s latest ‘Active Minds’ article received by us late on the 22nd July 2020:

Jason Pidcock

Head of Strategy, Asian Income

China’s recovery drives Asian bull market

The bull market in Asia continues, noted Jason Pidcock, Head of Strategy, Asian Income. We’ve seen lots of large index constituents in China and Hong Kong rallying sharply, with some reaching all-time highs. Some people may find this a bit ironic given the negative political news coming out of China and Hong Kong, but this hasn’t prevented capital from flowing into those markets. Jason highlighted that this isn’t just in terms of domestic inflows – foreign capital is also buying Chinese and Hong Kong stocks.

What’s really driving Asian equities is the V-shaped recovery in China’s economy, said Jason. China is in a better position than many other economies, with second-quarter GDP up 3.2% year on year, following a contraction of 6.8% in the first quarter. So, it’s on track with expectations for a full recovery from the decline sometime in the second half of the year. Lots of Chinese businesses are doing well, too. Companies are forecasting profit growth and they’ve got strong balance sheets. While many parts of the world are seeing dividend cuts, many Chinese companies are not cutting dividends, and furthermore, many are actually growing their dividends, partly because of their net cash positions.

There’s been minimum impact from recent geopolitical tensions on Hong Kong, too. The UK symbolically suspended its extradition treaty with Hong Kong and placed it under an arms embargo, and the US has officially removed Hong Kong’s special trade status. Economic impact will be quite minimal though, as it should only affect about 1% of Hong Kong’s total exports. The Hong Kong dollar peg is unlikely (and technically difficult) to change, and capital flows into Hong Kong have gone up sharply since the announcement of the drafting of the National Security Law at the end of May. Hong Kong has had to lock down the economy to a degree because of a new flare up in virus cases, but most people are seeing this as temporary; it’s not having a big impact on most of the larger-weighted stocks listed there.

Overall, Jason expects to see Asia Pacific equities continue to trend higher; within the region, it’s Northeast Asia that’s driving growth.

Chris Smith

Fund Manager, UK Growth

Why aren’t supermarkets making more profit?

The UK has been the worst performing major developed market year to date, said Chris Smith, Fund Manager, UK Growth. That in itself isn’t so remarkable, as the UK has lagged behind major global peers for much of the last five years, but Chris said that the magnitude of the underperformance has accelerated in 2020. The reason for this is partly because the UK stock market has a larger exposure to structurally challenged or cyclical sectors, such as oil majors and financials, than many of its peers, and not much of a technology sector.

So, if the UK market faces so many challenges, where can a stock picker investing in UK stocks look for opportunities? Chris used a couple of examples to illustrate where he does, and does not, find attractive stock ideas in this environment.

At first glance, supermarkets seem like one of the winners from the Covid-19 pandemic, registering record like-for-like sale growth in many cases as shoppers stockpiled ahead of lockdown. Chris, however, sees them as structurally challenged ‘old world’ businesses. Despite that record sales growth, supermarket profits are forecast to be broadly flat year-on-year in the UK. This is because the increased sales were focused on low margin staples, and office workers, tourists etc staying at home means supermarkets are selling far fewer high margin items such as ‘on the go’ convenience food and drink. Online deliveries have gone up significantly, but this also has a dilutive effect on margins, as purchases are again focused on low margin items and the costs of fulfilling orders are higher than for in-store purchases.

Ultimately, Chris doesn’t see supermarkets as an attractive long-term investment for a growth investor like him. More attractive, however, is the testing and certification industry. It is essentially an oligopoly, with three major players all experiencing strong organic growth across the cycle from 2006-2019. The industry is also exposed to a lot of long-term structural growth trends, such as more regulation, higher safety standards, ESG in the supply chain, and cybersecurity, among others.                           

Richard Watts

 Head of Strategy, UK Small & Mid Caps

UK midcaps – go where the growth is

Richard Watts, Head of Strategy, UK Small & Mid Caps, also discussed the UK’s recent underperformance, noting that the domestically-biased FTSE 250 Index is down around 25% year to date, which is significantly worse than the 16% decline of the more international FTSE 100 Index.

In turn, the UK stock market is trading at a 25% discount to its long-term average against the broad global equity market as represented by the MSCI World Index. This valuation trough is at its lowest since World War II, so it does look cheap. The UK market has also hugely underperformed relative to where government bond yields are so, in Richard’s view, the market looks very good value.

Part of the malaise is down to the weakness of the pound and its volatility against a backdrop of Brexit uncertainty in particular hurting many midcap stocks, which collectively are more exposed to the economically-sensitive parts of the economy (housebuilders, engineers, travel companies, pubs and restaurants) than the FTSE 100 Index. More recently it has also reflected the outlook for dividends, as many companies had to cut dividends or cancel them to access government support schemes.

In the small and midcap strategy, Richard and the team have been overweight in structural growth for some time – it’s been clear that the pandemic has greatly accelerated the shift towards online retailing, pulling forward some two to three years of growth. This is having a very positive impact on the earnings of such companies and the strategy. And it’s no surprise that the team is underweight in travel, store-based retailers, pubs and restaurants, as they think consumers are still very nervous. This can be seen in the number of restaurant table bookings (not) being made. The team expects pub like-for-like sales to be down around 40% year-on-year, so they are wary of having too much exposure to these areas. Instead, they are seeking economically-sensitive exposure through those businesses that they believe will emerge from the crisis in better shape and which are not reliant on consumer spending where, in their view, it will take time for confidence to recover.

Joel Ojdana

Credit Analyst, Fixed Income

Don’t miss the double-B boat

Double-B credit offers great opportunities in today’s US high yield market, said Joel Ojdana, Credit Analyst, Fixed Income. Classed as the better-quality end of high yield credit, these businesses are well suited to the ‘new normal.’ In a world where negative real rates imply a slow global recovery, and with enormous debt at both the corporate and sovereign level likely to dampen productivity, these better-quality balance sheets and businesses should benefit.

Unprecedented support from the Federal Reserve also continues to drive spreads tighter, said Joel, and has opened up a financing window to corporate borrowers that is not at all typical during a ‘normal’ recession. With more monetary support expected by the market, BB-credit spreads are likely to further compress, in Joel’s view, offering a great opportunity. That said, it’s important to discriminate, because the pandemic has created both winners and losers within the US high yield segment – the Technology and Utilities sectors have outperformed year to date, while the Energy and Transport sectors have plummeted, for example. Finally, BB-rated corporates also frequently issue 10-year bonds, which is typically the longest duration in the high yield market and therefore should offer the most potential upside if spreads do tighten further.

These articles are useful for breaking down input into sectors, allowing experts of their particular sectors to offer insight within their specified field. This facilitates an all-round view of the markets.

Please keep reading these blogs to keep your own view of the markets up to date.

Keep well and safe

Paul Green


Team No Comments

Markets in a Minute: Global equity markets pause for thought

Please see article below from Brewin Dolphin’s ‘Markets in a Minute’ update received 15/07/2020.

China shares rally as state media declares bull market

Global share markets were mixed over the past week, although China has been a standout performer after investors piled in, encouraged by a state-owned newspaper that effectively declared a “healthy” bull market was on the way in Chinese equities.

Investors took the message to heart, and Chinese shares surged by almost 6% at the start of last week on trade volumes roughly double the average.

In the UK, a rally late in the week lifted the FTSE100 comfortably above the 6,000 level but performance in most markets was fairly muted due to the ongoing downbeat news around the coronavirus, worries about tensions between the US and China, and uncertainty around stimulus packages.

Last week’s markets performance*

  • FTSE100: -1%
  • Dow Jones: 0.95%**
  • S&P500: 1.75%**
  • Dax: 0.84%
  • Nikkei: -0.07%
  • Hang Seng: 1.4%
  • Shanghai Composite: 7.3%

*Performance in the week to Friday 10 July
**Performance from close of business on 2 July to Friday 10 July due to Independence Day holiday.

A mixed start to this week…

Share markets largely continued their bullish run on Monday, with the FTSE100 gaining 1.33% and European markets hitting their best levels in almost a month as reports suggested progress on two vaccine candidates in the US. China and other Asian markets continued their strong run.

However, the S&P500 and the Nasdaq in the US both closed down yesterday amid worries about the rolling back of reopening plans in some states due to rising coronavirus cases. That led to Asian markets falling sharply today.

Chinese policymakers have also become uneasy about the rapid rise in Chinese stocks, leading to two state-backed funds to begin offloading equities in a bid to cool the overheating market. The Chinese government has also sought to dissuade investors from accessing unauthorised sources of margin financing. The Shanghai Composite closed down by 0.8% today. In early trading in the UK and Europe, shares were heading down.

Stimulus cliff-edge in US, knife-edge summit in Europe

There can be no doubt that both the US and Europe need more stimulus to maintain their recovery, or at least prevent a sharp deterioration. In the US, a central plank of March’s $2trn stimulus package is being debated; the extra $600-a-week in unemployment benefits, which is paid on top of each state’s existing unemployment benefits, is due to end on July 31. This means a potential cliff-edge income drop for around 20m unemployed Americans that would cause average unemployment payments to fall by about 60%. Also, cash payments to households have already been received, and probably spent.

Fortunately, both the Democrats and Republicans want the extra stimulus to keep flowing, so it is more than likely we will see these benefits extended.

This coming Friday the EU will debate the €750bn coronavirus recovery package at a special summit, and it is far from certain the fund, dubbed Next Generation EU, will pass in its current size or format – the current proposal is that the fund is made up of grants and loans, and more fiscally conservative states, particularly the Netherlands, are objecting to the grants element and also, reportedly, the size of the package.

Virus news

While the headline figures from case growth around the world, and particularly the US, still make dire reading, a glimmer of hope can be seen in the decline in Swedish cases, although this could be for any number of reasons (less testing, some more lockdown measures). Crucially, however, there was an important suggestion that immunity may have spread more widely than believed, which has global implications.

Marcus Buggert of The Centre for Infectious Medicine at Karolinska Institutet, Sweden, said: “Our results indicate that roughly twice as many people have developed T-cell immunity compared with those who we can detect antibodies in.”

Apparently, this could mean herd immunity is achievable with far lower infection rates of, say, 20% rather than the 60% suggested more commonly.

Overall the trends in Covid cases may be improving but it is hard to say due to fluctuations in testing and the distortion of the Independence Day holiday in the US. Even outside Sweden, European cases seem to have been suppressed for now. The case growth rate in Brazil could be peaking but there is little sign of any improvement in Mexico, South Africa or India.

In Asia, after a week in which Tokyo recorded 100 new cases per day, they subsequently jumped more than 200 on Thursday.  Hong Kong will close its schools early for the summer holidays after finding 34 new locally transmitted cases on Thursday.

On the vaccine front, research into T-cell immunity is now being incorporated into vaccine development, in addition to the focus on antibodies we have seen so far. If successful, this could significantly boost any vaccination’s efficacy and the duration of immunity, though it is still very early days.

Summer statement boosts housing sector

In his summer statement last week, Chancellor Rishi Sunak refused to extend the government’s furlough scheme past October as widely expected, but he announced a stamp duty holiday until next March for properties worth up to £500,000. That boosted shares in housebuilders, and it may prompt an uptick in housing transactions. New buyer enquiries at estate agents were close to record levels in June, according to last week’s survey from the Royal Institution of Chartered Surveyors. Its survey, which questions surveyors around the country, suggested a slight recovery in prices and a big increase in properties being listed for sale. But looking ahead, views were a little more negative, implying price declines of 5% over the remainder of the year.

New buyer enquiries vs Nationwide average house price

 RICS House price balance vs Nationwide average house price

 Make the most of higher-rate tax relief in your pension while you can

Sunak hinted that efforts to address the dire situation that is the national finances will begin in November’s Budget. This may finally sound the death knell for one of the most attractive tax breaks in the UK, namely higher-rate tax relief on pension contributions.

It’s hard to see any more obvious revenue-raising step that would be so effective, and it has been speculated about for a decade. It would suggest anybody who hasn’t taken advantage of this year’s allowance should seriously consider doing so before the autumn.

One of the main focuses of this update are the views on potential monetary and fiscal policy actions from governments, particularly the UK, EU, China and US. It now seems that market analysts have turned their attention to how governments will act to deal with the financial consequences of this pandemic in the long term and how that will affect the markets as they begin to recover.

Paul Green 15/07/2020

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Cornelian Market Commentary – July 2020

Hector Kilpatrick, Senior Investment Director and Head of Risk Managed Funds at Cornelian Asset Management, summarises the previous month and gives the Investment Outlook for July:

The MSCI UK All Cap NR index returned +9.4% during the three months to the end of June, whilst the MSCI World ex UK (£) NR index returned +20.4% in Sterling terms. Equity markets recovered a significant amount of the ground lost during the precipitous decline in asset prices observed during the first quarter of the year. The collapse was triggered by a sudden realisation that the economic impacts of the policies enacted to restrain the COVID-19 virus outbreak would result in a deep recession, the scale of which could challenge the debt-based capitalist economic system. However, policy makers were swift to announce enormous economic support packages, both fiscal and monetary. These, alongside the easing of lockdown restrictions in many jurisdictions and positive incremental news concerning the extraordinary effort being applied to develop possible vaccines, helped improve investor confidence during the period under review.

In Sterling terms, most major regional equity markets returned between +17% and +22%, the exceptions being the UK (see above) and Japanese markets (MSCI Japan NR (£) Index, +12.0%). The American equity market provided the strongest return (MSCI USA NR (£) Index, +22.0%), aided by the index’s significant exposure to technology and pharmaceutical stocks.

The UK equity market return was impacted by the index’s significant exposure to energy and financial stocks (which, in share price terms, have lagged the recovery seen in other sectors), the persistence of COVID-19 within the population and concerns regarding the outcome of Brexit negotiations.

“Gilts continued to perform well producing a positive return as investors anticipated further policy announcements which would support government bond prices.”

Despite the more positive investment environment, Gilts continued to perform well producing a positive return (iShares Core UK Gilts ETF, +2.4%) as investors anticipated further policy announcements which would support government bond prices. Investment grade debt rebounded strongly as credit spreads narrowed following the announcement that the Federal Reserve would support corporate debt markets (iShares Core £ Corporate Bond ETF, +9.6%). ‘Riskier’ high yield debt also produced a strong positive return but interestingly, given the seemingly more ‘risk on’ environment, marginally underperformed investment grade debt (iShares Global High Yield GBP Hedged ETF, +9.4%).

The Brent crude oil price ended the quarter at $41.2/barrel, an increase of 80.1% since the end of March. The hard stop to global economic activity has seen a collapse in demand for oil products, however production cuts and an incremental relaxation of economic lockdowns has helped the oil price recover somewhat.

In the three months to the end of June, the gold price rose 12.9% to $1781/oz. Sterling weakness versus the US Dollar boosted returns marginally such that the value of gold held by UK based investors rose by 13.5% (to £1,443/oz). 

Investment Outlook

During the second quarter of the year asset prices rallied strongly following the sharp COVID-19 related declines witnessed during the first quarter. Policy makers have been impressively swift to announce innovative measures to support economies which have experienced a hard stop. Measures range from the fiscal (furlough schemes, top ups to unemployment benefits, emergency lending/grants to corporates, business rate reductions and the like) to the monetary (interest rate cuts, printing of money to finance the purchase of government debt and, to a lesser extent, corporate debt).

These measures (which have driven down the cost of government and corporate debt financing) allied with tangible successes in suppressing the spread of the virus in developed economies have, in aggregate, improved the confidence of company management teams concerning the outlook for economic growth. They have also galvanised investors’ risk-taking appetite and have led to a strong bounce in regional equity market indices. News concerning the unprecedented drive to find successful treatments and vaccines has also helped improve sentiment.

However, looking a little more deeply into the components of the market rally calls into question the improving confidence expressed by rising asset prices in general. Those companies most exposed to the economic cycle have lagged index returns appreciably. Some sectors (such as banks, energy and travel) remain close to their lows relative to index returns. The companies that have driven index levels higher include those which have seen a sharp acceleration in demand due to their web-based propositions and those which have little sensitivity to the economic cycle.

The question that needs to be answered therefore, is whether the sugar rush of extraordinary policy measures, both fiscal and monetary, will give way to a more sober assessment of the outlook for economies, and thereby profits. We believe this is likely, albeit with caveats.

“The real scale of ‘post COVID-19’ unemployment has yet to reveal itself.”

The first thing to note that the real scale of ‘post COVID-19’ unemployment has yet to reveal itself. With companies embracing higher debt levels to remain in business in the short term, the hangover could be material, particularly as the unfettered release from lockdown will only be assured after a successful vaccine is found and manufactured at scale. Unfortunately, it doesn’t appear that this condition will be satisfied in 2020. In a realistic best-case scenario, we may receive increasingly positive news concerning the development of a vaccine through the rest of the year, however populations will still have to suppress the spread of the infection until vaccines can be deployed in early 2021.

Barring the possibilities that the virus may lose some of its potency, or that specific populations are able to eliminate the virus completely from their midst, one has to assume that the rate of virus spread will correlate with the pace that economies open up (notwithstanding any seasonal effects). If correct, this means that the ‘V’ shaped recovery that is hoped for may well disappoint as rolling localised lockdowns are introduced which will ensure heightened public awareness of the need to continue to socially distance, etc. This may well sustain higher levels of unemployment, and therefore result in consumers hoarding cash after the first flush of spending driven by pent up demand.

“Companies are likely to continue to operate in an environment of reduced demand and increased costs for the rest of 2020.”

This means that companies are likely to continue to operate in an environment of reduced demand and increased costs for the rest of 2020. Given these dynamics we expect the rate of company bankruptcies to accelerate, which may undermine banks’ confidence to lend to corporates. The withdrawal of this financial lubricant from the engine of economic activity will further exacerbate the issues described.

It is also worth noting that over the past month or so the Federal Reserve has stopped the net printing of money and this slowdown in the rate of monetary stimulus could become a headwind to further asset price appreciation.

Nonetheless, central banks around the world have continued to demonstrate a desire to manipulate asset prices higher during times of economic crisis which reduces the perception of downside risk. This doctrine has not only resulted in all-time low interest rates, but also threatens the adoption more widely of negative interest rates. Given the enormous amount of cash currently sitting on the side-lines waiting to be deployed in this low (or no) interest rate environment, the pressure to put this money ‘to work’ is high and only small incrementally positive developments could be enough to see this happen. Therefore, given these factors, it is prudent not to be positioned too defensively.

The view from this update is that although signs of a recovery are apparent with market indices rising and lockdown gradually easing, this could be temporary relief before the real economic effects of the Coronavirus Pandemic begin to reveal themselves down the road. 

The global coordinated policy response needs to be maintained and strengthened.

Paul Green


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Royal London: Economic and Market View Update

Please see below for Royal London’s latest market update received 29/06/2020. They provide an update on the impact of recent market events:

RLAM Economic Viewpoint

Survey data, high frequency data and now increasingly the hard data too, continue to show that developed economies are in the ‘recovery phase’ of this crisis. Albeit this is the somewhat mechanical bit as economies are allowed to open up and you get a bit of pent-up demand set loose as well. Some of the recent data points have shown much stronger than expected improvements. This, however, doesn’t tell us much about the next stage of the recovery that economists generally expect to be much slower. Social distancing, scarring (including permanent job losses, business closures and balance sheet damage) and residual fear of the virus (including as it relates to job security) will all influence the strength of that recovery and government policy still has a crucial role to play in all of them.

June business surveys improve substantially: Data in the past week or two has included several June business surveys and these have mostly seen solid improvements, with some notable upside surprises in European business surveys and US regional business surveys. However, the headline composite PMI business survey indicators for the US, eurozone, Japan and the UK remain below 50. Taken at face value, remaining below 50.0 would normally signal that these economies are still shrinking. However, mapping PMIs accurately to economic activity levels is somewhat hazardous after such a big shock to GDP (the survey asks whether things are better/worse, rather than by how much). Nevertheless, if you look at the commentary in the PMI surveys – social distancing has eased, helping many firms reopen and firms are more optimistic, but many companies also report weak demand as customers remain cautious. That is – so far – consistent with economies taking time (likely, several quarters) to get back to ‘normal’ levels of activity after a sharp initial recovery phase.

US data continue to suggest a strong start to the early stage recovery, but virus data more worrying: May retail sales, durable goods orders and some housing data have bounced significantly more than expected. However, US COVID-19 numbers have, in the meantime, become more worrying. The increase in virus cases in some states is likely to worry consumers, including the prospects of social distancing being reversed and the impact on job security. Meanwhile, Congress and the White House have still not agreed a package of economic support measures to replace those set to roll off this summer. US government policy interventions have so far done a good job in shielding household balance sheets (and therefore spending power) from the crisis. Reduced/disrupted fiscal support and the progression of the virus both have the potential to curb US recovery momentum.

Here in the UK, data also signal a solid start to the recovery phase but also a weak underlying labour market and an economy still in need of policy support: May retail sales were also an upside surprise, rising 12% in May. They are still 13.1% below February levels, but that’s a solid start to the recovery phase, especially since it was only mid-June that saw ‘non-essential’ retail stores reopen. Just as in the US, however, the UK’s early stage recovery has needed – and still needs – plenty of policy support. Government borrowing was also somewhat higher than expected in May and the levels of government debt as a percent of GDP, on the headline measure, moved above 100% for the first time since 1963. PAYE data meanwhile show the number of paid employees fell by 449K March to April. Early May estimates indicate another drop of 163K. Job vacancies in May fell to a record low. The furlough scheme is set to start unwinding from August, but this is a labour market that is far from out of the woods yet. That was recognised by the Bank of England who extended their asset purchase programme, though reduced the pace. They have become more concerned about long-term damage from the crisis. How the labour market evolves from here will be a key driver of their decisions going forward including, potentially, a decision around negative rates.

Market view from Piers Hillier, CIO, RLAM

The upwards trend in global equity markets was met with some resistance this week, resulting in sideways equity trading and moderate credit spread widening. Investors were perturbed by a sharp increase in Covid-19 cases in the US as the country reported a record number of new cases on Thursday. While the coronavirus appears to be under control in most developed countries at this stage, global new case numbers are at record highs; driven by the US, Brazil and India. In an effort to mitigate the damage of a second wave, US regulators gave in to a long-sought demand for a relaxation of the Volcker Rule as they allowed banks to invest in hedge funds and private equity funds.

Markets have also been rocked by increased global trading tensions. There have been signs of further difficulties in the trade negotiations between the US and China. Meanwhile the US threatened to impose tariffs on $3.1bn of European products, prompting an angry response from the European Commission.

On a more positive note, numerous key economic data releases have been far stronger than anticipated recently. There have been strong improvements in US and UK retail sales and in the European and US business surveys. While activity surveys are still consistent with contractions in many economies, possibly reflecting the elevated corporate debt and unemployment levels, they show that businesses are markedly more upbeat as they emerge from the worst of the lockdowns.

Reflecting a perception that the UK economy is somewhat stronger than expected, the Bank of England surprised investors at its latest meeting. While it announced an additional £100bn of bond buying, as had been expected, it slowed the pace of its purchases. The Bank said it would spend the £100bn by the end of the year, rather than by the end of August as the market had hoped. Of course, the very fact that spending was increased reveals the fragile state that the Bank considers the economy to be in, with serious concerns over the unemployment outlook.

The focus for many in the UK has been on further opening of businesses – both non-essential retail in mid June, and with the prospects of pubs, restaurants and others opening from early July. As investors we are pleased to see this – we are under no illusions that we as a society will return to prior habits in terms of spending; many of us will feel differently about being on a train, plane or in a restaurant for some time. And with other countries seeing flare-ups in the virus, it is clear that this road will have a number of bumps in it. However, it does appear that we are now through the first phase of this crisis, and returning to a more normal cycle of data and market reaction.

Royal London is the UK’s largest mutual life, pensions and investment company. This in-depth market outlook by a market leading financial services organisation adds valuable insight to our consensus view of the markets. It is evident that in recent times these views have been dominated by the Coronavirus Pandemic, but we have also now been offered insight into the socio-political tensions that have recently risen, particularly in the US, and how they in turn are effecting the economy. This is an example of how frequently reviewing these updates gives us a better view of the ‘bigger picture’.

The opinions of market leaders are key to keeping our understanding of the markets up to date. A wide variety of these views from different sources help us paint a more accurate picture on the events of the world and how they are influencing market behaviours.

Paul Green


Team No Comments

SEI Strategic Portfolios: May 2020 Monthly Commentary

Please see below the May edition of SEI’s monthly market commentary received today (11/06/2020):

Global equity markets continued to rally in May, based on expectations that the economic impact of the global pandemic will be limited to a few quarters.

Executive Summary

  • Global financial markets continued their sharp rallies in May, albeit short of their remarkable April rebounds. The “risk-on” sentiment came amid a push by local governments to slowly reverse lockdowns of non-essential economic activity; the promising news of progress made in the race to develop COVID-19 vaccines; and the sustained extraordinary support of central banks.
  • Equities around much of the world experienced a choppy first half of May that ultimately gave way to a strong second half for the month. However, mainland Chinese and Hong Kong shares were outliers; both came under pressure as the month progressed, with the latter finishing the period with a steep loss. European and US shares generated solid monthly performance, while UK shares delivered more subdued gains.
  • Government-bond rates followed divergent paths from country to country. They mostly declined for UK gilts, yet increased for those with the longest maturities, while they increased across all maturities for eurozone government-bonds. As for US Treasurys, short- and long-term rates increased as intermediate-term rates declined for the month.
  • Considering the stability-focused Strategic Portfolios, relative returns were boosted by overweights to economically sensitive debt, including corporate bonds, selected emerging markets, as well as peripheral Eurozone debt. Consistent with its design, the Global Managed Volatility Equities fund lagged in a rising equity market but was able to provide meaningful risk reduction.
  • For the growth-focused Strategic Portfolios, some of the challenges faced by value managers in recent quarters continued to ease somewhat in May, with several periods of stronger returns potentially indicating a bigger rotation. Our core investment case for SEI’s overweight to this area remains the same: extreme relative valuations between the most expensive and cheapest parts of the market. SEI further believes that the post-crisis environment may provide further support for this positioning, given the huge stimulus being provided.

Market Overview

  • In the UK, the Chancellor of the Exchequer Rishi Sunak announced his intention to extend the government’s mortgage-payment holiday beyond June as its initial three-month timeframe approached. As of mid-May, UK banks had granted these repayment holiday terms to 1.7 million homeowners.
  • The Bank of England’s (BoE) Monetary Policy Committee held course following its 7 May meeting, keeping the Bank Rate at 0.1% and reiterating a commitment to purchase £200 billion in gilts and investment-grade corporate debt. The central bank’s May policy statement cited data that pointed to a significant drop in household consumption and plummeting expectations for sales and business investment during the second quarter.
  • Sharp contractions in manufacturing and services conditions appeared to slow across the UK, eurozone and US during May, but remained far from returning to growth. The UK economy shrank by 5.8% during March, representing the largest monthly decline in more than 20 years of UK gross domestic product (GDP) measurements2. Economic activity contracted by 2% over the first quarter of 2020. The UK claimant count (which measures the number of people claiming unemployment benefits) jumped to 5.8% in April from 3.5% in March. Retail sales in the UK fell in April by 18.1% from the prior month and by 22.6% from a year earlier.
  • In mid-May, the European Commission put forward a proposal for nearly €2 trillion across the EU, with €750 million devoted to recovery efforts and another €1.1 trillion to budgets over the next seven years. The European Central Bank (ECB) did not meet to address monetary policy in May. Germany’s constitutional court ruled during May that the ECB must produce justification for the legality of its bond-buying programme, in order to determine whether the Bundesbank could continue to participate.
  • The eurozone contracted by -3.8% during the first quarter and -3.2% over the one-year period. Construction output dropped -14.2% in March after slipping just -0.5% in February. Loans to nonfinancial corporations climbed by 6.6% in April, following an increase of 5.4% in March, continuing a corporate-credit bounce from February’s ebb.
  • Towards the end of May, the House of Representatives passed an additional $3 trillion in COVID-19 relief funds, but the legislation is held up in the Senate with unclear prospects for approval. Legislation passed the US Congress in early June that would extend the period during which companies can spend loan proceeds and remain eligible for loan forgiveness.
  • The increasingly tense US-China relationship was further stressed in May by a US push for more transparency in the ownership of US-listed Chinese companies and the US government’s barring of certain Chinese holdings from its retirement plans. China, for its part, imposed an 80% tariff on all barley imported from Australia over the next five years in an apparent response to the Australian government’s call for an independent inquiry into the origins of COVID-19.
  • The US Federal Open Market Committee held no meeting in May. As part of its crisis-period response, the Fed began buying corporate bond exchange-traded funds on 12 May to support secondarymarket liquidity. Fed Chair Jerome Powell announced near the end of May that the central bank’s Main Street Lending Program would be operational within days.
  • US consumer spending fell by 13.6% during April, registering the sharpest one-month decline since the data series began in 19593. New jobless claims for US unemployment benefits declined from more than 3 million per week in early May to about 2 million later in the month. Nearly 15 million US credit card bills went unpaid during April, and more than 8% of US mortgages were in forbearance as of mid-May. US GDP declined by an annualised 5% during the first quarter of 2020, the largest quarterly decline since the final three months of 2008.

Selected Asset Class Commentary

  • Global Fixed Income: During the month, the building block benefited from an overweight to peripheral Eurozone countries, overweights to Mexican and Colombian local rates, and off benchmark exposures to corporate credit and US Treasury inflation-protected securities (TIPS). Alliance Bernstein’s overweight to peripheral Europe contributed. Off-benchmark exposure to credit, mortgage credit risk transfers and US TIPS also helped. Wellington struggled on an underweight to the euro and overweight to the yen. A duration overweight in the US further detracted.
  • Global Managed Volatility Equities: The building block achieved meaningful risk reduction in May, but struggled on the back of pronounced style headwinds to low-volatility names and unfavourable overweights to consumer staples, utilities and health care. An underweight to mega-cap stocks was beneficial. Wells Fargo Asset Management fared better against style headwinds during the month, benefiting from greater diversity exposure and its momentum bias. LSV Asset Management’s value bias suffered most. Its exposure to cheaper low-volatility names was amplified by stock-specific disappointments in US biotechnology and insurance.
  • Global Equities: Overall market leadership remained unchanged in May; however a strong rotation in the middle of the month was also in evidence, was not quite enough to change the overall monthly results, but sufficient to challenge investors’ complacency in expensive growth stocks. With low volatility being the biggest laggard over the month, LSV’s results detracted the most at the Fund level. US value manager Poplar struggled with both style headwinds and sector positioning, as well as poor stock specifics in the technology sector. Towle, also a US value manager, was a significant contributor, benefiting from its bias towards smaller and higher risk stocks. Maj Invest, a global value manager, also outperformed due to similar positioning. Momentum managers, both Lazard and Intech, continued benefiting from the established trend favouring profitability and growth and contributed accordingly.

Manager Changes

  • Macquarie Investment Management (Macquarie) was removed from the Emerging Markets Equity building block in May. Macquarie’s strategy does not align with SEI’s alpha-source framework. Alpha refers to returns in excess of a given investment’s benchmark. Active investment managers seek to exploit various factors or sources of alpha in order to add value.


  • The sudden and widespread stop in economic activity has never before been experienced on such a scale. The ultimate impact on GDP is truly anybody’s guess. The first quarter of 2020 saw an annualised decline of 5% in the US. The second quarter will likely be one for the record books; as of late May, Wall Street economists forecasted a quarter-to-quarter annualised decline exceeding 30%.
  • National governments have been quick to respond. All central banks are in crisis-fighting mode, having learned valuable lessons during the 2008-to-2009 great financial crisis, re-establishing unconventional bond-buying programmes and creating some new facilities to expand the types of accepted collateral in order to extend cash to companies in need of liquid assets.
  • The Fed and other leading central banks have moved with an alacrity and forcefulness that we find commendable. But central banks cannot single-handedly support this economic shutdown. In our view, fiscal policy—in the form of direct income support, tax deferrals, loan guarantees, and outright bailouts of industries badly damaged by the halt of economic activity—must be the prime tool used to address this crisis.
  • The fiscal response is occurring with a speed and decisiveness seldom seen in history. The US Congress passed a series of COVID-19 relief bills that easily topped 10% of GDP. Other developed countries have pursued a similar strategy of massive income support and liquidity injections. Italy, the European epicentre of the virus, will be particularly hard-pressed to do all that is necessary to stabilise its economy; its government debt-to-GDP ratio is already well above that of other major European countries.
  • In our view, a financial crisis can be averted in Europe if the ECB backs up the debt. This is now-or never time for the EU and eurozone. The stronger countries must come to the aid of the weaker, or else face an intensified popular backlash that could threaten the unity of the economic zone.
  • The onslaught of developments presented by the spread of COVID-19 has forced financial markets to recalibrate prices sharply as expectations about different industries and the overall economy shift quickly. Investors should gain some reassurance, however, from the fact that an earnings recession caused by virus-containment measures is generally only expected to last a couple quarters or so. If market prices are based on a long-term, multi-year expectation, then this fallout should represent a relatively small part of the market’s forward-looking focus.
  • Only time will tell whether markets have sufficiently discounted the pain that lies ahead. Investors should be cognisant of the fact that earnings estimates will likely come down hard over the next two quarters. These waterfall declines in earnings could still drag equities down with them. It all depends on how willing investors are to look beyond the valley. Markets should prove resilient if there is a common belief that fiscal and monetary responses to the crisis thus far will successfully prop up the global economy.
  • Right now, as always, we are focused on trying to deliver as diversified a portfolio as possible to all of our investors, regardless of their risk tolerances. We’re considering the known risks inherent to the capital markets as well as the uncertainty that comes with any long-term investing plan, such as the black swan we’ve encountered in 2020.
  • At SEI, we build and maintain long-term-oriented portfolios by being attuned to evolving relationships between asset classes. SEI views its strategies as robust and built to handle the kinds of challenges presented in today’s environment. At a portfolio level, we encourage investors to stay diversified and avoid short-term trading in these volatile markets.

SEI is a global provider of investment processing, investment management, and investment operations solutions. We believe the best way to keep up to date with the general market consensus in this rapidly changing market is to seek out and take on board the opinions of a diverse and expansive range of high-quality fund managers.

This has always been our approach to views on the market even pre-pandemic. Although the views across the board have generally recurring themes, it is important to see a wide range of views to hear consistent messages and see ‘the bigger picture’. 

Paul Green