Log inMarket Update from Jilly Mann
Last week was a week of mixed emotion for global stock markets, as they seemed to rebound from the depths of despair to climb at record levels midweek, only to track back down again. This is the big danger during this period, that investors and commentators get carried away with the hype of recovery, when perhaps we aren’t yet “out of the woods” in some key regions.
At the start of last week, we explained that we felt ready to buy back into UK and European equity stocks. We felt, and still do, that in the UK and Europe there was clear evidence of a plan to fight the Corona Virus and these stock markets had fallen to such lows, that whilst they could still track slightly lower, they were unlikely to lose again as severely as they had over the previous month. Perhaps not calling the bottom of the market, but pragmatically taking a view that in spite of the news flow and sentiment, it was better to be back invested than not and risk missing the bounce back when it comes.
We maintain this view and have continued to add back into this position. The news flow across Europe, including the UK is starting to turn, as we reach what is hopefully the peak of the virus for now. As ever with stock markets, they don’t necessarily need good news to prompt a resurgence, they just need less bad news and a feeling that there is some control over events, as much as there can be with a pandemic like this. With this in mind we have added some more UK Smaller company and Mid Cap exposure to portfolios, as these areas typically fall the most as we head into recession, but also rebound the quickest on the other side.
We have also added some China exposure back into portfolios. I know this may not be popular with all investors and for those of you who have expressed specific concerns on the country in the past, we have taken that into account for your portfolios, but the reality remains that China is a global superpower, and second largest economy in the world, who will continue to exist in its own right whether there is global outrage over their approach to matters or otherwise. We had concerns a few weeks ago about the way China was handling this crisis and those concerns were well-founded, but since then they have so far managed to work through this crisis as well as any country and they are in many ways setting the precedent for what the rest of the world will face. There will be some economic hardship to come from China, as with the rest of the globe, but we feel now is the time to again build up a position there with the First State Greater China fund that we previously owned.
In contrast, we have held back from allocating back to the US at the present time. We had considered buying back in, having seen the stimulus packages which Donald Trump has announced. This should usually give confidence to markets, however, we think the problems in the US run much deeper than the other major economies, as they don’t seem to have a plan to tackle the virus. Trillion Dollar stimulus packages will only help if there is investor and consumer confidence, both still appear lacking despite the US stock market rally last week. Their markets have subsequently tailed off again and with party politics and inter-state rivalry seemingly dictating the national approach to tackling the Corona Virus, the extent of the identified cases and deaths in the US looks likely to overtake all others by quite some distance. The US economy will rebound, but for now we think the US leadership has underestimated the impact the virus will have on their economy and people amidst bluster about blaming everyone else, so have held back allocating to the US for the time being.
Events are moving fast and we will continue to act when we see fit to try to ensure that our client portfolios are sensibly allocated, but there can be no definitive answer to the question of when will be the right time to move back into the US if we look at the data today. We are aware that through this uncertainty there is a danger that negative sentiment in the US could drag down other global stock markets where we have chosen to reallocate to, but we think that we will see some decoupling of stock market returns in the weeks ahead. There are parts of the globe which, whilst still suffering, are taking an informed approach to tackling the virus and propping up the economy. The US is throwing money at a problem with seemingly no strategic plan to stem the virus. We think investors will take this into account and so we believe our estimation of relative optimism for the UK and Europe for example will continue to be the case. We are near the bottom, if not at the bottom and that is when we need to invest to pick up the rebound which will inevitably come in the not too distant future.
Our advice is not to be too carried away on the up days on the stock markets at the moment, nor too despondent on any down days, in spite of the headlines. This situation is fast paced with plenty of moving parts and as ever, we will only ever invest in a market or asset class if we think the reward of being invested outweighs the risk. At the moment, for the areas we have invested back into we remain cautiously optimistic for the coming weeks and months, but are prepared for a few more bad days scattered amongst signs of recovery.