Log inMarket Update from Jilly Mann
Knowing where to start with this particular update was unusually tricky because unlike recent weeks, where the news flow has been coming at us thick and fast, there is no single new aspect that is spooking markets at the moment.
Boris Johnson’s health remains a significant concern and should things worsen, we would expect a temporary knock to confidence in the UK, however, so far markets haven’t reacted to the news in any grave manner. We suspect there are two reasons for this. Firstly, the Government are working so closely with the medical profession that their policy is very much driven first and foremost by the science. Yes, there are economic factors weighing heavily on industry and productivity at present, but the stimulus measures which continue to be put in place and the overdraft agreements with the Bank of England mean that the cost, although it will be huge financially, remains secondary to the wider health of the population.
Secondly, it wasn’t too long ago that the presence of Dominic Cummings in Whitehall was being cited as the reason for Sajid Javid’s resignation as Chancellor. This was touted as a huge negative at the time and a significant threat to the integrity of the Treasury. The theory was that Number 10 was taking greater control of policy, with Mr Cummings seemingly behind the scenes pulling the strings of Central Government. However, the better than expected performance of Rishi Sunak since he became Chancellor of the Exchequer has quietened many of those naysayers. The relatively smooth continuation of the daily briefings and Government business in Boris Johnson’s absence, which we have seen to date, has also hinted at a more coherent public message that has soothed any concerns there may have been over the future of the UK Government or UK equity markets. With a stronger leading party in situ, one can only hope that Keir Starmer’s appointment as leader of the Labour Party also brings about an improvement in British political debate. Some of the issues the country is facing today require cooperation and pragmatism, not political point-scoring, as nobody in this country is unaffected by Coronavirus, whatever their political leanings.
The announcement over lockdown extensions globally will cause unease amongst residents, but markets must already be factoring in further extensions until such time as infection rates fall consistently and so in all areas bar the US, we feel that lockdown updates won’t significantly move stock markets.
We remain circumspect on the US economy and find it difficult to make a case for investing in the American investment markets. US stock markets continue to have days where any concerns over coronavirus feel like a dim and distant memory, but this belies reality. The UK infection rate has risen, but it feels like the actions taken here to date are starting to come to fruition, it is hard to argue this point for the US. This is one of those times when we will only know how right, or how wrong, we are about the US response to dealing with the virus in hindsight, but for now, we are more comfortable being out of the US stock market than being in it. Basic maths suggests to us that if we contrast the UK to the US, based on either population or land mass, there is no conceivable way that the US will not end up topping every chart for cases diagnosed, deaths and ultimately the required fiscal stimulus. There is nothing triumphant about that conclusion, it is simply our view that the US market remains propped up by unwarranted optimism and we would rather invest in areas of the globe who appear to have a better grasp on reality, than chase the US market which at face value continues to have some very good days without anyone really being to explain why that should continue.
This echoes our view that no recovery is a one way street, however quickly we think the markets will pick up from this crisis overall. A recovery doesn’t happen at the same rate or at the same time in every corner of the globe and we need to try to work out when and where is best to reallocate to. If we look at some of the decisions we have made thus far, we were quite bold in our support of the UK markets when we bought back into UK equities in mid-March. What was key though was to not just buy back what we had previously owned. In times like this, we have to be flexible and sometimes take bolder positions than we have in the past, as not all funds are right for all market conditions. The HSBC FTSE All Share Tracker fund which we purchased, yet hadn’t previously owned on any large scale, is up by over 14% since we decided the time was right to buy back in, the Marlborough Multi Cap Income fund, which has previously been a staple of our portfolios, is up over 18% during that period. The two funds are investing in quite different areas, but for us, just buying back the FTSE 100 wasn’t the right thing to do. UK mid and small caps historically lead recoveries when they have been hurt the most on the downturn and so in each region of the globe we are deciding which sectors and companies will give us the best opportunity to succeed in order to generate returns for our clients.
On a similar theme, the First State Greater China fund is up 5% since we reintroduced this into our portfolios. Newsflow from the region has remained supportive of the surprisingly positive economic data from within China, whilst concerns have started to re-emerge about broader Asia and their ability to quell the virus from re-surfacing as soon as restrictions are lifted.
Natural Resources (Commodities such as Oil, Gold etc.) has been a slower play, but there are ongoing talks about a deal being made with OPEC, Saudi Arabia and Russia. The US have already expressed their expectation that these talks will succeed and the oil price has risen significantly on days where the outlook for such an agreement is more positive. Natural Resources may not be a long term play in our portfolios, but we expect it to provide a short, sharp, extreme bounce when an agreement is reached.
It leaves me to say thank you for the feedback we have received to these updates to date, it is much appreciated to hear your views and to know that you are reading them. We can only hope that soon we don’t need to update you quite so frequently as the world returns to some kind of normal, but whilst we are in the midst of this crisis, we will keep you updated on our thinking and how we are doing, hopefully with more right than wrong, but only time will be the judge of that.