Market Update from Jilly Mann
I write this at a time where for once the stock market seems to be the least of everyone’s worries, but this is no time for complacency.
On a positive note the BMO Property Growth & Income fund has returned to being fully tradable. You may recall that this fund got caught up in the widespread moratorium which applied to UK commercial property funds, even though only 30% of the fund is in bricks & mortar. Whilst other UK property funds remain in a limbo state for now, the BMO Property Growth & Income is back up and running. The performance has been reasonably good over the last few weeks in spite of everything and so we aren’t intending to sell it straightaway, but its availability does create more liquidity should we need to call upon it.
I thought now might be a good time to set out what plans we have in place for different market scenarios from here. Our hope is that the second half of this year sees a fairly swift rebound in global stock market indices. This rebound is unlikely to reflect the underlying economic data and may seem unsustainable at times, but there is still enough underpinning markets at the moment to suggest the strongest will not just survive, but thrive and that Central Banks will do whatever it takes to keep that base case going, completely foregoing their responsibility for reducing the ballooning National Debt.
I don’t doubt that in 10 years time we will still be bombarded by political point scoring over who got what wrong to end up with National Debt of such extremes everywhere. Undoubtedly, time diminishes the impact and desire we all feel in the moment to survive, regardless of our political leanings, but I can’t see Governments wanting to be the first ones to take their collective feet off the gas and simply allow rampant unemployment or inflation to take hold.
If our base case for 2020 is correct, then we expect a tougher environment in 2021. Assuming the virus is dampened down and any second or third waves have been and gone with subsequent outbreaks diminishing in their impact each time, much more scrutiny will be placed on economic policy, as well as the long term sustainability of individual stocks listed on stock exchanges around the world.
It is difficult in the environment we are in now to easily identify all the winners and losers of Covid 19. Yes, some retailers are obvious losers, the shift to online retail from the High Street has been expedited, the move to digitalisation of industry has had to fast forward, leaving many behind, but the fallout won’t be truly visible for a few months yet. There remains time for some businesses to reinvent themselves, perhaps they may just be slower at doing so, but they can survive. Some industries maybe just need global supply chains to kick back into life to really thrive and boost their ongoing sustainability. In short, we are going to hear a lot of bad news in the coming months, but that won’t necessarily equate to a death knell for swathes of firms. It is going to take some time for much of this to play out.
At present we are positioned for selective recovery in markets around the world. We remain underweight traditional US companies, preferring those with niche skill sets such as environmental prowess or technological advantage. We prefer Asia to Africa or Latin America. We prefer the UK to Europe. The key point being that these positions are fluid. This pandemic is so unprecedented that we are having to move much quicker than we would even in a normal, yet rapid recession. If we need to move and if one or more of these positions becomes outdated then we can do so and we will move as soon as we have sufficient belief in the rationale for that stance.
This leads me on to a theme that we seem to be reading a lot about at the moment, the erasing of history. I’m not going to wittingly enter the debate of various political hot potatoes which are present at the moment, but needless to say from my viewpoint as a Classicist, I do think history has a place in society and we need to learn from it, to improve what we do in the future, albeit mankind has a habit of learning too slowly too often. If we took history out of the investment world, decisions might actually be simpler. We wouldn’t have to look at endless charts comparing every recession known to man and how markets reacted as a result, even when the broader context of life was radically different to how it is today. We could look forward with optimism and hope to the forthcoming US Election seeing two fresh candidates with divergent ideas coming into power, we could forget the turgid Brexit will we/won’t we years and relish it all starting again at the end of this year.
That idealised world doesn’t exist though and so we can only look at the past, taking from it the relevant parts and try to use those to improve what we do in the future. Certainly, when we have reacted to this pandemic compared to previous market downturns, we have had the courage of our convictions in order to put to one side much of the traditional economic theory which should have prevailed in our decision-making. There will be a time when economics returns to once again being the central pillar of investment management, but the last few months have not been that time. Had we followed traditional economic logic, our portfolios would likely have suffered much greater downturns, because economic history does not account for unprecedented Central Bank action. In fact, since the Global Financial Crisis of 2008/09, Central Banks around the world have been more concerned about papering over the cracks, rather than fixing the problems which render the usual economic cycle of bull to bear market uncorrelated with logic.
What we can take from history in this pandemic is perhaps more based at stock level than geographic or asset level. If a company has good management, a strong balance sheet, sufficient capital to see it through a downturn, the necessary resource for development and the potential acquisition of Intellectual Capital from weaker entities, then those are all positive signs for that stock to survive Covid 19, just as it has survived similar recessionary threats in the past.
So, this leads me on to what we do if our base case Plan A doesn’t play out and with the speed of developments during this crisis, there is a strong possibility that it will happen. Whilst that may seem alarming, I can reassure you, that we have various plans in place for various different outcomes. If the worst happens, and we see global stock market declines en masse and the spread of a Second Wave globally, we will sell down again to either cash or government bonds. We aren’t going to do this based just on one or two days of negative markets, there has to be a catalyst in our minds for making that move and it has to be as significant as we experienced in Corona Virus Round 1, so don’t expect us to be in and out of markets trying to time things to avoid every possible down day, but if we feel there are enough factors working together that mean protecting capital for a period of time is the right option, we will take those steps.
Equally, if we see that some markets or asset classes are likely to be adversely affected more than others due to specific conditions, we will continue to do what we have been doing and take action swiftly to come out of those areas. There is a risk that markets stabilise and we miss some upside, but we always start from the point of view of protecting capital first and then trying to maximise the recovery through fund selection. To explain what I mean by that, just buying a simple FTSE 350 index tracking fund (i.e. a basket of the largest 350 stocks in the UK market) over the last three months would have returned 29.47%, whilst buying the Threadneedle UK Smaller Companies fund (held in your portfolios) has returned 42.99%. To sum up, we can’t be a slave to the index either or up down, but when we sense it is time to invest for a recovery, we need to make sure we select the funds which will give us the most long term advantage over the market.
I will continue to update you on specifics of our market strategy over the weeks ahead, but I’m aware that there is growing momentum behind market naysayers and the potential for a Second Wave (or even the continuation of the First Wave in the US) affecting markets and confidence negatively, so hopefully this gives you some reassurance that we aren’t tied to one scenario. We have plans ready for a range of outcomes and are set fair to implement them whenever the need arises and regardless of how long or short a period we have owned the asset in question. Now isn’t the time for particular asset loyalty, we have to look at this cold-heartedly and make decisions that stand up in that moment, knowing that ultimately it is your hard earned capital we are looking after and that remains paramount in our minds.