Please find below our Investment Market Update as at 12th June 2020.
Blue Sky Investment Market Update
Well, I warned that the markets may have gone up too quickly and this week the FTSE 100 is down by just over 6% clawing back much of its 6.71% gain of last week. Worse still, was the normally buoyant S&P 500 in the US, falling by 5.89% yesterday and the Dow Jones by 6.9%. This naturally fed into Europe first thing this morning but although the FTSE 100 started off dropping by 1%, following up on the 3.99% fall yesterday, it has now 1.3% higher.
It was only last Friday that I stated:
About three weeks ago, we were warning of ‘choppy waters ahead’, but, except for a minor wobble, this didn’t materialise. It could be argued that the surge in prices means that down the line, we are going to experience a bigger wobble than we would have perhaps expected some three weeks ago.
We don’t like surges in markets because they have a habit of encouraging short-term profit taking and activity on the downside. Wobbles however, are inevitable when investing in stock-markets.
No man’s land
The FTSE 100 and most other equity indices in Europe are in ‘no man’s land’ at the moment, and before we can see further forward momentum, more positive news and data is required.
The stimuli, particularly in Europe last week, was well received but this week markets have decided to focus on the negative news emanating from the US. Weak US economic forecasts amid fears of a second wave of Coronavirus infections impacted sentiment. Certain states like Texas, Arizona, California and Florida have all seen a rise in the number of new cases.
The US Federal Reserve stated on Wednesday that the world’s largest economy faced a long path to recovery from the pandemic and they expect to keep interest rates near zero until 2022. No surprise really, but after the surge last week, the froth has been taken off equity markets, with the Fed’s predictions being perceived as being more gloomy than expected.
Airline stocks were hit badly yesterday over fears that a resurgence of the virus could restrict and delay travel across the globe. Retail and leisure sectors also struggled.
Within our portfolios, it’s worth a reminder that the focus is largely on well run businesses with strong balance sheets. Where possible we have incorporated infrastructure and sustainable investments into portfolios on a global basis, with anticipation that such areas will be stimulated by Government support and changes in sentiment.
LGT Vestra and the positioning within portfolios
In light of the pull-back this week, I think it’s worth reiterating that LGT Vestra are holding reasonable cash positions, particularly in their more cautious portfolios. As of 11th June, they are holding cash positions as follows:
- Defensive = 13%
- Cautious = 12%
- Balanced = 10%
- Growth = 3%
- Adventurous = 2%
On the one hand, when equity markets are flying you want this money to be put to work but on the other hand, during times of stress, one is grateful for holding cash. Keeping some ‘powder dry’ is not such a bad thing when so much is uncertain.
We have had many discussions with LGT Vestra and they have been reticent to chase the recovery and buy those ‘value’ stocks which have been decimated. This week’s activity would support this strategy. In time, this money will be deployed back into assets but for the time-being, these cash holdings are providing protection on the downside. Their most recent comment has been:
“We believe that our quality bias is fully justified and don’t want to get drawn into the value rally that has been seen in recent days. We continue to believe the quality of balance sheets and growing earnings will be key to long-term returns.”
As you would expect there are tweaks to the strategies within the LGTV portfolios and I thought it would be useful to inform you of a few recent changes:
“With uncertainty surrounding Brexit to continue and dividend payouts in the UK being cut, along with the value nature of the UK market, we have decided to exit our holding in Schroder Income. We are also moving more global in our approach, recognising the generally lower quality of companies in the UK index. In its place, we have added a Global Leaders fund, it is very much in the quality growth style but with little overlap with our existing global equity exposure. The fund has some exposure to Emerging Markets, Asia and Financials that are not found in our other global equity funds. Part of the proceeds raised will be allocated to an ‘Event Driven’ Strategy Fund.
This fund seeks to generate superior risk-adjusted returns by exploiting a range of transformative corporate events. Investments embrace mergers and acquisitions, company offers, spin offs and split offs, financial/strategic restructuring, management changes, synergistic acquisitions, as well as other events. Generally, the strategy will be comprised of 80% equity securities and 20% credit securities.”
Sounds a tad complicated I know but basically, what I wanted to portray is that there is a lot of work going on behind the scenes to protect portfolios, but to also optimise returns.
Enjoy the weekend.
Gary and the 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.