Please find below our Investment Market Update as at 5th June 2020.
Blue Sky Investment Market Update
It’s been a good week
As I write, the FTSE 100 has risen by circa 5.5% this week and European markets have followed suit. In contrast, the S&P 500, such a stellar performer normally, has only risen by 0.27% this week, but of course the news emanating out of the US has not been the best! However, the S&P 500 has risen this afternoon as investors focus on yet more Government stimulus rather than the news that one in five Americans is now unemployed. By way of perspective, the S&P 500 has risen by some 40% since the low point in March of this year.
Stimulus is the main game in town
Despite the poor economic news, as I’ve mentioned on previous occasions, the markets are more forward looking, and they are enjoying a historic rally. This recovery will prove to be one of the best investment opportunities in our lifetimes. As equities are rising, the dollar has fallen to its lowest since March. With a risk on sentiment, the momentum has been away from safe haven assets, like the dollar.
A quote in Bloomberg today, states that the markets are riding a wave of enthusiasm as investors bet on a global economy awash with stimulus. Fiscal and monetary aid announcements from Germany exceeded expectations this week and reports showed that the Trump administration expects to spend up to $1 trillion in the next round of stimulus.
Markets, like the FTSE 100, have also been helped by the rising oil price as it looks on course for its sixth weekly gain, as OPEC reached a tentative agreement to extend record production cuts. Remember, 6 weeks ago we had negative oil prices due to lack of demand and storage issues. The Euro stoxx 600 index, headed for its best week in two months on the back of a €750 billion stimulus package to support the European economy.
I don’t wish to spoil the party!
As you know, I’ve been very positive about the expected level of stimulus and its effects on the markets. As a company, I believe our view has been played out, with a ‘tick-shaped’ recovery across many equities. Now it is my turn to be more guarded; not that I’m saying you should ‘head for the hills’ but we must be mindful of how quickly the markets have recovered. In many sectors there has been a record recovery.
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.
There are some very vocal fund managers and analysts who are predicting a significant correction because of the awful economic numbers that are going to be reported. However, this doesn’t mean they are going to be right.
As reported in Bloomberg, Peter Chatwell, the head of multi asset strategy at Mizuho International, said “we probably have a window of maybe three months where data is going to improve. This is going to drive a very supportive backdrop for credit spreads to keep tightening and for equities to be rallying”.
Of course, there are a multitude of different opinions from professionals, as we have seen around the reporting on the medical inferences of Covid-19. Once again, a balanced portfolio will help protect portfolios should there be a correction, but for the time-being extraordinary stimulus is paving the way.
Infrastructure and Sustainable
It has been a busy week in many ways. We tuned into a webinar with Foresight around their infrastructure funds, and I was a guest speaker on a Webinar for LGT Vestra on why Sustainability is important. There were over 200 IFAs tuning in which highlights the interest and momentum in this space. We then held our Blue Sky webinar with Phoebe Stone, on matters Sustainable. The feedback has been excellent and has further stimulated interest around investing in an environmentally responsible way. Many clients were galvanised by the possibilities of ‘impact investing’.
It was interesting to hear Angela Merkel talk about how much of the stimulus will be directed towards improving infrastructure which is what normally happens in times of recession. It was timely therefore to talk to Foresight about their views, particularly with regards to the ability of their funds to continue paying a healthy dividend.
When looking at the profitability of a company, it’s important to consider the source of its revenue streams. The impact of Covid-19 on the hospitality sector is evident to all as bars and restaurants cannot sell to their consumers whilst they are shuttered. In contrast, some technology and Software as a Service (SaaS) companies such as Netflix and Amazon Prime are seeing increased demand. But where does infrastructure fit in?
One of the biggest benefits of infrastructure investing is the security of revenue streams available to investment companies. The revenue streams underpinning assets are typically over long periods (often decades) and contractual in nature, meaning there is significant reliability to their income. This is very beneficial in the uncertain world we find ourselves in. You’d be right to point out that the contracts are only as strong as the counterparty (the person paying the bills) and if they fall over then the revenue streams will dry up. This is why Foresight favours assets where revenues are underpinned by Government therefore reducing this risk significantly.
In practice we have found that the vast majority of our underlying investment companies have reaffirmed their earnings forecasts for 2020 and beyond. This is in stark contrast to those less fortunate companies that earn revenue based on demand.
Whilst there will always be times in the market where fundamental analysis takes a back seat (2008, Covid-19 sell off) and share prices fluctuate based on investment sentiment, these company fundamentals should ultimately shine through, and we believe these sorts of assets are extremely well-placed to weather the storm whilst others potentially fall around them.
Again, it shows why it is very important not to classify all companies or markets under the same loose terms.
Have a lovely 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.