19th March 2020
We are sure you have been following the news about recent world events including Coronavirus and Oil and the impact this is having on the investment markets.
With this in mind, we have asked two Discretionary Fund Managers, Newscape and Vestra, to comment on the situation and how it has affected their managed portfolios.
Global stock market movements over the last week have been unprecedented and nothing short of dramatic. The sell-off of shares around the world has been heightened by the measures governments are imposing for entire nations including the lockdown by the Italian government, the draconian measures announced by President Macron in France last night and the new tightened measures introduced by the British Government. Not to mention the growing problems faced by the US and elsewhere around the world in response to the pandemic. With this backdrop, LGT Vestra, your investment manager, has provided a simple and straightforward analysis of the current investment landscape, their views as to how the market might behave in the short-term and why it is important to remain calm and remain invested.
The continued spread of coronavirus and the wide-scale quarantining across the world has led to fear over reduced global demand and disruption of supply chains. The impact of this was compounded by disagreements last week between OPEC members, leading to the oil price falling from $60 a barrel at the start of the year to around $30 today.
Equity markets have fallen dramatically in response to these events and for the most part, indiscriminately. Some sectors have been hit harder than others such as energy and smaller companies which have led the sell offs, as well as those companies with complex supply chains and businesses reliant on discretionary consumer spending.
It has become clear that the impact of the virus is likely to be with us at least for the medium term and in response, consumers are likely to save rather than spend in the face of adversity and uncertainty. The concern for investors is that this develops from a health crisis to a liquidity crisis and beyond.
We all know that markets fear uncertainty and the global economic impact and the threat of recession is an unknown. However, what is becoming clearer is that we are beginning to witness a sustained and co-ordinated response from governments and central banks, such as the Bank of England and the Federal Reserve in the US with fiscal packages and a cut in interest rates. We anticipate that this over time should support markets.
Whilst this current situation is undoubtedly worrying over the short term, we continue to remain committed to investing for the long-term prospects of the model portfolios. We would urge caution and restraint in these volatile conditions and do not recommend any change to your investment strategy that you have agreed with your financial adviser, in light of recent events. We are investing in line with your risk profile and time horizon and as such, we would recommend that you remain invested in accordance with this, rather than to sell out, realising losses.
9th March 2020
Ahead of today’s additional sharp movement down in global equity markets (associated with the sharp correction in the oil price), the FTSE 100 had already retreated 14.3% year to date with Global equities (MSCI ACWI) also down 8.9% year to date (local currency, price return basis, close 6th March 2020). The former correction was associated with the Coronavirus and its likely impact on global growth. We discuss this and the oil situation in more depth below.
The Newscape Active Strategy MPS portfolios are multi-asset and global in nature and, hence, benefit from this diversification across these multiple asset classes. Consequently, whilst not immune from the general market sell-off, the portfolios have delivered the following performance year to date whilst remaining within their targeted volatility mandates since inception:
Defensive – 0.75%
Cautious – 1.24%
Balanced – 2.88%
Opportunistic – 3.44%
Growth – 3.91%
Priced as of close 5th March 2020 (estimates)
Coronavirus dominated the headlines through February feeding in to intensified market volatility. As we write, there have been in excess of 110,000 cases reported with in excess of 3,800 deaths. Whilst this is certainly distressing, it is important to note that more than 62,000 cases have already been reported as recovered. By way of comparison, there have already been in excess of 91,000 deaths from seasonal influenza year to date. From an investment point of view, markets are focused on the related impact on supply chains and global economic growth as various communal places have been closed and quarantines imposed.
Against this backdrop, manufacturing and service sector indices have fallen sharply in China whilst also reducing elsewhere in the world. On a slightly more positive note, however, the US-Sino trade deal has seen progress with China halving tariffs on $75 billion of US imports. Following this, the US confirmed that tariffs on $120 billion of Chinese imports would also be halved and that new tariffs would not be implemented on other goods.
Furthermore, Central banks have shown willingness to support the financial system with a raft of systematic rate cuts. Most notably, the FED stepped in with an emergency rate cut of 50bps taking its target range to 1-1.25% (March 3rd), and others look set to follow.
Nonetheless, the virus will inevitably have a negative impact on global growth prospects this year, albeit the absolute impact remains difficult to quantify at this stage.
On the subject of the sharp correction in the oil price, markets were further rattled today by the fear of an oil price war between OPEC and Russia. As oil prices fell in the wake of the Coronavirus, Saudi Arabia and its OPEC partners agreed to cut production in order to support prices. Whilst OPEC were hopeful of cooperation from Russia, the latter refused to fall in to line. Saudi has reportedly since responded by saying it will ramp up production in April once the current production agreement expires at the end of March; a significant warning shot at Russia. Inevitably, the demand for oil was set to be hampered by the Coronavirus this year. However, the supply side war comes as an additional and unexpected shock. We will be monitoring developments between OPEC and Russia over the coming days.
Against this backdrop, our portfolios remain in a relatively defensive mode with a small Underweight in global equities versus FTSE Russell benchmark indices, and a bias towards quality equities which are typically of a lower volatility in nature. On the fixed income side, we retain a bias towards ‘shorter’ duration government bonds and corporate credit (again, lower volatility in nature). In terms of commodities, we have refrained from any direct investment in oil or other base commodities instead reserving this allocation for infrastructure. Coupled with this, we have maintained a position in lower volatility Autocall products.
CIO market commentary and MIFID II reporting
9th March 2020
Our Investment Committee has met this morning and decided to neither reduce nor increase our equity risk, with the below commentary from our Chief Investment Officer, Jonathan Marriott.
The LGT Vestra Investment Committee met this morning against the background of dramatic falls in equity markets. The large scale quarantining in Italy and continued spread of coronavirus elsewhere has raised fears of reduced global demand. This has been compounded by the Organisation of the Petroleum Exporting Countries (OPEC) failing to agree to a cut in oil production, with Russia refusing to agree and Saudi Arabia responding to this by cutting the oil price and suggesting they will instead increase production. This is spurring an oil price war that is targeted at getting more marginal producers to close down production, particularly US shale producers. With reduced global demand and threatened increased supply, the oil price fell 30% this morning. The UK equity market opened over 8% lower with oil companies leading the way down. As I write it looks as if the US equity market will open down around 5%. Government bond prices are up and yields fell sharply with the ten year gilt now yielding just 0.08% and US Treasuries 0.45% for ten years. As risk comes off and the interest rate differential declines, the low yielding currencies have risen. Thus the Euro, Yen and Swiss Franc have risen against the US Dollar. The pound against the Dollar has been lifted by the strength of the Euro.
We have been holding cash and the debate at the Investment Committee was whether to add equity exposure on the dip. We have been inclined to buy dips at times of stress but the committee decided not to increase exposure yet. The existing exposure is biased to quality growth companies that have generally outperformed the falls in the markets over the last two weeks, and the bond positioning has helped to offset some of the worst of the markets. However, when funds reprice the portfolios will be down again. The reasons to hold back for now are as follows:
- Clearly the coronavirus will have a negative effect on GDP in the first half of this year but the duration of the effect is uncertain. Airlines, travel companies and related industries are likely to be hit particularly hard and may be slow to recover. When China closed down due to coronavirus the fears were over the supply chain. As China appears to be getting over the virus with few new cases reported, production is resuming and these supply fears are now being replaced by fears of reduced demand, due to the virus and wholesale measures to counter the spread. In a years’ time we may see a sharp recovery but we cannot be sure that the maximum impact has been priced in.
- Oil price falls would normally be positive for consumers outside the oil producing regions of the world. However, as a result of coronavirus consumers may wish to delay spending. Shale oil producers and those involved in the retail and travel sectors may see layoffs increasing unemployment.
- Equity earnings and dividends look very attractive relative to bond yields. In the credit crisis the earnings on the S&P 500 fell 35%. If this was repeated the equity market could still look attractive long term but investors may take time to adjust to this scenario, especially as we may see some companies cut their dividend/not buy back shares.
The question as to whether to buy the equity market comes down to the question; have we reached maximum fear yet? Buying feels like catching a falling knife and for now the Investment Committee is not confident that this point has been reached and believe they have sufficient exposure for the time being. However, Investors who have been partially invested, or sitting on the side-lines, should see this as an opportunity to gradually increase exposure rather than cut risk.