Please find below our “Investment Market Update” as at 13th March 2020
Blue Sky Investment Market Update
Markets are like the weather!
The sun is shining today, and equity markets have risen (the FTSE 100 up over 4.5% as I write at 9.30am) but this is not reflective on how awful it has been out there. The weather, we can put up with, but it’s a lot harder to be so stoic when you see your investments and pensions fall in value.
It was only Tuesday of this week that we sent out an interim market update after significant falls on the equity market on Monday. Writing today, feels as though we have woken up from a really bad storm and everything appears calm… for now!
What has happened?
Due to the impact of Coronavirus, we have seen the biggest short-term fall in global growth expectations since 2008. To make matters worse, yesterday was the biggest one day sell off for equities on Wall Street since 1987. As markets fell there was collateral damage across most asset classes; even gold fell as investors sought liquidity. In other words, cash.
Overnight, it looked like carnage across Asian markets too but things turned around very quickly. Bloomberg this morning reported that benchmark indexes sank across the region, triggering trading halts from Seoul to Bangkok, Manila, Jakarta and Mumbai – by 1.40pm Australian stocks then staged a record intraday swing to trade up 4.4%, India was in the green and Thailand pared a plunge of 13% to gain 1%. The MSCI Asia Pacific Index gauge trimmed its loss to 1.7% after sinking as much as 6.7%. Crazy stuff!
So, Australia had a record intraday swing. This just shows you the danger of being out of the markets at these levels, as sentiment can turn very quickly. We could give you all sorts of statistics but that’s yesterday’s news, I’m sure what you want to know, is what do we believe will happen from now on. With this in mind we dialled into LGT Vestra yesterday to get their views via Sanjay, who many of you know. For those who don’t, Sanjay Rijhsinghani is a Partner at LGT Vestra and a frequent guest speaker at our seminars.
Comments from LGT Vestra
There is no doubt that we are experiencing abnormal trading conditions, with traditional investing behaviours being squeezed towards panic mode.
Some sectors have been battered such as travel and leisure, airline, retail and oil related stocks. Those that have held up relatively well, with the emphasis on ‘relatively’, have been high quality growth stocks such as Microsoft, Apple and Amazon. These are companies that have strong balance sheets. Something LGT Vestra focus on with regards to selecting funds for the portfolios.
Sanjay went on to say that in this climate, high yield credit is a concern because to a large extent, such stocks behave like equities. Despite the attractive yields on offer, LGT Vestra have not focussed on such assets and instead, have invested in secure longer-term credit through Government bonds. An asset class that has performed well during this downturn, tempering losses.
This is somewhat ironic! The best performing equity market has been China. Yes, China. Imagine, if we had recommended investing in China, you would have thought we had lost the plot! Chinese markets have been helped by the lockdown, support from their Central Bank and because the number of new cases being reported is slowing. Nevertheless, Chinese equities are still in positive territory for the rolling year.
The hardest hit region has been Europe. Of course, Trump thinks it’s all their fault anyway! The number of cases in Italy has caused real economic disruption at a time when Europe is undergoing a structural change. Prior to the Coronavirus, there were encouraging signs across the region, with green shoots of a recovery being evident but this virus has put paid to that, for the time being.
Why have equity markets plummeted?
Simply, it’s all about earnings. Markets are predicting a fall in earnings globally by some 25-30%. Hence why equities have fallen by the same perecentage. Markets are the first barometer for positive and negative economic conditions, but they have a habit of being over-sensitive and are vulnerable to manipulation. They tend to overshoot on both the upside and the downside.
Whilst there has been lots of support from Governments and Central Banks, including the lowering of interest rates by 0.5% in the US and UK, the markets have also been worried about whether these institutions know more than we do and are fearful that they are holding information back. LGT Vestra’s view is that they don’t, because this situation is unprecedented.
Interestingly, besides the interest rate drop, we have had lots of rhetoric from Trump but as yet, no action on fiscal stimulus which would help the markets.
LGT Vestra’s positioning within the portfolios
• Sovereign debt has held up the best of all asset classes and there has been a good exposure within the portfolios, especially in the lower risk strategies. Yet, even this asset class has not been immune as traders have begun to sell what has done well.
• Other assets that have held up, are index linked gilts. A peculiar situation, for when we have lower growth, we would normally see this area suffer but with the cost of imports likely to be much higher in the short-term, then they have been deemed a safe haven. The Jupiter Strategic Bond fund which transcends the bond space has been a good holding within the LGT Vestra portfolios.
• Conversely, the Morgan Stanley US Advantage fund has performed relatively well compared to many other funds, helped by its exposure to technology stocks.
• China was mentioned earlier in terms of how their stock market has been pretty resilient and this has been reflected in any Asian holdings within the portfolio. Fundsmith and Stewart benefitting in the higher risk elements.
• LGT Vestra are really pleased that they sold the Schroder income portfolio which has a large exposure to Banks and oil companies. Of course, these sectors are major components of the FTSE 100.
• It’s also worth noting that LGT Vestra have held a healthy proportion of cash of between 10-12%. This caused a lag when the markets were performing well earlier in the year but now, they will look to put this to work, beginning as early as next week. They will begin drip feeding money into equities which is exactly what we have recommended.
Sanjay finished by saying that equities are not expensive on a historic basis and despite what some commentators have stated, we have to look at the relative value compared to other assets like Bonds and cash.
A perspective from Blue Sky
It was interesting to hear that we shared the same views as Sanjay/LGT Vestra. We believe this will be short-lived and, with all the stimulus, the shape of the recovery across most markets, will be in the shape of a tick. Equities won’t go back up as quickly as they have come down but don’t underestimate how quickly sentiment can change.
With interest rates at record lows and the yield on bonds being equally low, the desire for equities will be back. If you can obtain a yield (income) of circa 4% from equities, then at such low prices, investors will return. It’s of course a matter of time and confidence.
We would encourage you not to watch the news intensively, nor keep looking at your valuation. We can assure you we are giving this our constant attention on your behalf. As much as you may wish to keep up to date with unfolding events, also be selective on the news you watch and don’t watch it just before you got to bed! I’ve written before about the news in previous blogs; watching sensational news flow doesn’t help your well-being. This morning I (Gary) stayed at home for a while to write this report and switched on the news, just to see what was being said. Boy, was it dramatic. I’m not underestimating the impact of the virus, but it would appear the end of the world is nigh. It’s not.
As I finish this script back at the office, I’ve just heard that the EFL and Premier League have suspended football until April. Rightly so in my opinion, but now a footballer and a high-profile manager has the virus (they are superhuman of course and wouldn’t possibly get the virus), suddenly the sentiment in the sports news has switched from complacency to an over-reaction. It’s the end of sport as we know it!
This is what we have to be mindful of in the markets; an over-reaction. Yesterday’s price drop already looks like a panic with equity markets on the climb today. At 11.35am this morning, the FTSE 100 is now 7.32% up! Anyone pulling out of the market yesterday has crystallised huge losses.
It’s also worth pointing out that when there is a raft of bad news, traders revel in ‘shorting’ the markets, which in essence is betting on an index like the FTSE 100 to fall which drives the price down. It has been reported that many traders, having ‘filled their boots’ have hopped off the shorts and have invested back into equities because they see good value at these prices. Similarly, traders often buy volatility protection but with the extreme movements, this now looks expensive and they are unwinding these trades.
It’s just worth pointing out that the news flow is worse than ever today. It is important to separate what you hear from the news and how it’s interpreted across the markets overall.
There are lots of views as to what happens now. In the short-term, we are in unprecedented territory as to the impact of the virus but most of us are investing for the medium to long-term. There is no need to panic. Your portfolios are well diversified and don’t underestimate the amount of stimulus the authorities will deliver to try and ensure that economies and markets recover. They did it in 2008 and so we expect them to do it again.
Now, more than ever, the cash flow/financial planning models come into their own, in delivering confidence. All the clients we have seen in the last week are still in a good position to live the life they want.
Investment Quotes from around the world
Some quotes, as of this morning:
“If the virus can be contained, global equities should make new stimulus-powered highs by the end of 2020. North Asia and the U.S. will likely lead gains, while Europe and the rest of [emerging markets] lag,” the analysts wrote.
Oanda Asia Pacific PTe
“Markets are schizophrenic at the best of times these days,” said Jeffrey Halley at Oanda Asia Pacific Pte. “A couple of glimmers of hope are enough to see aggressive short-term momentum buying, generated”.
Barings Asset Management (Asia)
“It appears that a number of long only fundamental investors are attracted by the increasingly attractive values stocks are offering right now,” said Khiem Do, head of greater China investments at Baring Asset Management (Asia) Ltd. “With this happening, it forces the short-term momentum investors to cover their shorts this morning. Shorts are aware that central banks and government entities may also implement policies to stabilize market .i.e. ban shorting, which in our opinion at Blue Sky, should not be allowed!
Asset Management One Co (Tokyo)
“The market needs to see clear signs of a peaking of patient count, globally, especially in the U.S. and Europe,” said Satoru Matsumoto, a fund manager in Tokyo at Asset Management One Co. “Given the track record in China, I am hoping that we may see some light at the end of the tunnel by early next month.”
“I don’t personally think that this outbreak will slow global growth too much, since it doesn’t stem from a credit crunch per se. But it’s inevitable that economic activities will be hindered given the declines in asset prices. Should oil prices remain low like now, the Indian rupee will be among those that look attractive. Those with higher real rates will have room to ease further and that will spur hopes for further declines in yield. The biggest positive of all is that China is actually starting to show some signs of recovery.”
“People are probably thinking there will be some kind of policy measures to support markets,” on top of ones already announced, said Tomoichiro Kubota, a senior market analyst at Matsui Securities. “We could see a huge rebound in the short term given how much the market has fallen”.
FURTHER BLUE SKY NOTICES:
Contingency plans at Blue Sky
We have, of course, drawn up contingency plans at Blue Sky. Most of us have remote access to the office anyway. We will of course communicate any changes which impacts us operationally. We now have the facility to present your cash-flow planning remotely which may be important, moving forward, for any pending reviews. Clearly, the situation is fluid and we’ll individually keep you informed of any actions we take with regards to our service.
10% fall in the markets
We are required under EU Legislation and FCA rules to inform clients when their portfolios have fallen by more than 10% from the value at the start of a quarter, taken from 6th January, 6th April, etc. This is a compliance requirement and is not a reflection of how any portfolios may have performed over the year or longer periods. Please take this communication as us informing you of a 10% drop over the period since 6th January, unless you are in the more cautious portfolios.
If you hold the Mariana 10:10 structured product then please note that the values you see for the FTSE 100 on Transact, are prices in accordance with the secondary market. In other words, as you are holding for the longer term (at least 2 years) this price isn’t applicable. We mention this because when looking at your valuation it skews your portfolio performance. Your decision to buy the structured product looks even more sensible, in light of current conditions.
Cancellation of our seminar
It probably won’t surprise you to hear that our investment seminar as of 16th April will be postponed. A pity, because this would have provided an even greater insight into the current dynamics of the markets.
Oh, and there was a budget on Wednesday. I did intend talking about the budget in this update but events overtake us. For another time.
We expect equity markets to soften going into the weekend as traders won’t want to be overly exposed. It’s going to be choppy for a while.
This period of uncertainty will pass, but of course, if you wish to have a chat with us about the current situation, please don’t hesitate to make contact.
Please try not to worry. Keep healthy.
The Blue Sky Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.