"Year to date returns across the portfolios have fared slightly better this week although all remain in negative territory. The biggest faller has been equities with the UK market significantly underperforming overseas markets. This is largely due to the UK having higher exposure to energy and mining sectors, consumer goods and banks, all of which have been hit hard. We have also seen double digit negative returns from commodities and high yield. On a more supportive note UK government bonds have delivered positive returns since the start of 2020 with long dated outperforming short dated, whilst property returns have been flat. These returns remain within the range of scenarios we model as part of our governance and oversight process for the Governed Range. We continue to follow our enhanced monitoring process throughout this period and are holding regular calls with senior leaders across the Royal London group and the investment management teams at Royal London Asset Management. This allows us to monitor market reaction, the impact on our investment strategies, customer behaviour and cashflows. We will continue to keep a close eye on economic indicators and market sentiment factors which inform our models and review any impact on our longer-term assumptions. Rest assured that if these are triggered, we will take action to adjust our strategic asset allocations which set the guidelines for our tactical positions. This will be done through our governance process and will follow recommendations from our Investment Advisory Committee. The portfolios remain well diversified across a range of asset classes and as long-term investors we are well placed to take advantage of the buying opportunities when the time is right.“
Please note that this is a fast-moving environment and markets and impacts on portfolios are changing. Opinions contained in this document represent views of our fund managers at time of writing.
Stock markets have bounced sharply this week, after a violent sell-off earlier in March, with more optimism on counter measures to mitigate coronavirus related damage to the global economy, now that the USA has approved a $2 trillion dollar package; however, uncertainty over both the depth and duration of the health and economic crisis remains high.
We have managed equity exposure lower as risks clearly grew rapidly and changed in this crisis. Markets had been expecting a virus problem largely contained in China but now, Europe is the epicentre and the USA has a growing issue. Added to that, oil markets have been thrown in to turmoil with Saudi Arabia and Russia increasing supply, weakening prices substantially. Other commodities, such as industrial metals, have suffered with expectations of slowing global growth or recession. Even gold has not been as resilient as some expected. We have been consistently underweight commodities, offsetting some of the impact of being overweight equities earlier in the year.
We are broadly neutral in equities but have not gone underweight as investor sentiment is extremely depressed – more so than in the Lehman crisis of 2008 according to RLAM’s proprietary indicator; valuations are more attractive and a broad range of monetary and fiscal stimulus measures have been announced. We remain moderately overweight US equities (including the tech sector) given the relatively defensive nature of the market and emerging markets, potentially a safer haven as the virus appears to be under control in China. We are underweight UK equities, a long-term underperformer hampered by a heavy resource sector weighting. We remain overweight high yield bonds, particularly short duration high yield, as we expect the asset class to be resilient over the medium term. We remain broadly neutral on UK commercial property where we have seen diversification benefits relative to equities. We have de-risked our currency positions, remaining short the economically-exposed Australian dollar and more recently moving short sterling while shifting in favour of the more defensive US dollar and Japanese yen.
"Equity markets may fall further as the virus is spreading rapidly in the US and Europe and forced selling is still in evidence. However, a sharp rally should not be ruled out.
We have a broadly neutral tactical view on equities at present. There will be very pronounced economic weakness in major economies in the near term and unemployment is rising sharply in Europe and the US. However, we have not gone underweight because investor sentiment is already very depressed according to our proprietary sentiment indicator, valuations are also more attractive and a broad range of monetary and fiscal stimulus measures have been announced that should boost the eventual recovery.
We may not yet have seen the lowest point in equity markets as the virus is spreading rapidly in the US and Europe and forced selling is still in evidence. However, we have not been surprised to see a sharp rally as these are common in “bear markets” with volatility very high.
More sustained recovery will probably have to wait until there is more confidence on the virus being under control globally, shuttered parts of the world economy are re-opened and consumer confidence rises from its lows. We expect our Investment Clock model to reflect this situation by moving quickly into disinflationary Reflation before moving sharply upwards into Recovery when the crisis ends. We intend to make full use of our active tactical asset allocation risk budget to add to equity exposure when we judge the time is right.
Our investment process has weathered difficult markets in the past and we added significant value over the 2007-9 Global Financial Crisis. We believe a disciplined and active approach to both risk control and tactical asset allocation will be crucial in portfolios, as markets respond to the current crisis and policy responses being implemented."
According to the BBC, a quarter of the world’s population are now in lockdown… and we are seeing a steep hit to global economic activity with it. Over the week, we’ve had data which helps clarify the scale of that hit, but also more policy measures designed to try and stop this sharp shock becoming a prolonged slump.
The economic outlook still depends on the path of the virus and the efficacy of social distancing measures. But, it also depends on the ability of the banking system, household finances and business finances to get through this in the kind of shape that means the economy can fire up again once the virus numbers ease and social distancing measures can be unwound. That’s where economic policymakers come in. Across major economies, the speed and scale of the policy response remains remarkable.
Data making the scale of near-term economic damage clearer: Recent high frequency data show activity like restaurant bookings have fallen precipitously in the US and Europe. The impact of the virus is starting to show through in business survey data which have sunk to levels similar to those seen during the financial crisis.
We are also now seeing evidence of steep increases in unemployment too, particularly the astonishingly large jump in US initial jobless claims data. In the UK, we know that there has been a big rise in the numbers of people applying for Universal Credit.
More and more economic policy support: Notable recent policy measures include the large ‘phase 3’ US fiscal package (nearly passed at the time of writing) and more measures from the Fed. We have seen a step up in the euro area’s fiscal response with, for example, another sizeable package announced in Italy and a large stimulus package passed in Germany.
Looking across packages and central bank responses, it is again important to note that these are performing multiple functions, in different and complementary ways, working to try and limit long-term damage to the economy. Looking at the $2trn US fiscal package for example, that includes:
"History was made this week when the US Congress approved a $2 trillion stimulus package to save the US economy. It is the largest congressional bailout in US history, dwarfing the $800 billion rescue package that was passed in response to the global financial crisis. The bill includes such measures as $1,200 payments to taxpayers earning up to $75,000 a year (plus $500 per child), a substantial expansion of jobless benefits and funding for businesses that have been hit by the coronavirus.
Global stock markets rallied strongly in anticipation of the fiscal stimulus. The Stoxx Europe 600 recorded its third best day ever and the Dow Jones Industrial Average had its biggest one-day rally since 1933, as Wall Street posted consecutive days of gains for the first time in more than a month. Risk assets within fixed income also fared positively, with the high yield market recovering from some of its losses.
As has become normal in markets recently, however, the positive sentiment was short-lived. Markets faltered as investors questioned whether the $2 trillion package would be enough to compensate for a shutdown in major parts of the economy that might last for months. Reflecting the severity of the situation, it emerged that the seasonally-adjusted number of Americans filing for unemployment benefits in the week ended 21 March had risen to a record 3.28 million.
Economists had been expecting a rise in jobless claims of between 1.5 and 2.5 million, already far in excess of the previous high of 695,000 set in 1982. Last week US Treasury Secretary Steven Mnuchin had warned of unemployment rates of 20% without government intervention. These numbers, reminiscent of the Great Depression, are a far cry from the record lows that we have become accustomed to seeing in recent years. The US dollar resultantly sold off, global stock markets gave back some of their gains and the safe-haven 10-year US treasury yield declined.
Meanwhile, Andrew Bailey was thrust into his first ever scheduled meeting as governor of the Bank of England; last week the Bank had an unscheduled meeting in which it cut interest rates to a record low 0.1%. While there was no further interest rate cut this time, in line with expectations, Bailey warned about the economic and financial risks posed by the coronavirus and said that the Bank stood ready to provide liquidity and/or asset purchases in times of stress.
As I said last week, liquidity is everything right now – liquidity for underlying companies as they try to cope with revenues falling by anything up to 100%, liquidity in investment markets, and liquidity within daily dealing funds. One positive effect of the policy responses we have seen is that markets are, if not calmer than last week, at least less volatile, and therefore liquidity in credit markets is better than it was. Our active fund managers will continue to focus on liquidity until we are in more normal conditions as we know we still have a long way to go in getting through this crisis.
As with many businesses across the country, we are operating almost exclusively from our homes, with just a handful of key staff still coming into our offices each day to safeguard certain essential tasks. This presents challenges but years of disaster recovery planning and preparation means that we have been able to do this with a minimum of disruption. Our objective remains to deliver the investment outcomes we promised, and we remain fully committed to delivering this during this very difficult period."
When considering the longer term outlook for the stockmarket, nobody really knows what the future holds yet, as we are very much in unchartered territory. On one hand, the coronavirus and economic news flow is terrible in the short term, and a recession in the second quarter feels inevitable. However, in a prompt reaction to the unfolding situation, there has been an enormous and unprecedented policy response from both the UK government and governments in other developed economies. We have seen a real blitzkrieg of monetary and fiscal policy responses, in keeping with the ‘war’ on coronavirus.
Valuations are optically very low by historic standards, but these numbers can’t be believed and we have no clarity yet on which companies will survive after the temporary government support is ultimately taken away. My view is that the death rate from COVID-19 is not so high that there is an existential threat to the way of life in developed economies. Humanity operates in groups, not in isolation. Life is just temporarily on hold. However, it feels clear to me that things will never be quite the same again – for instance, will global air travel ever come back fully? Equally, there will eventually be reasonable ‘herd immunity’ from coronavirus and some form of immunisation will probably be developed to lessen the impact from future attacks and viral mutations of coronavirus.
Governments worldwide need to build a bridge from where we were economically immediately pre coronavirus to the post coronavirus economy. The initial policy responses we have seen so far are all part of this. The cost of building these bridges will mean much higher government debt levels than have hitherto been the case, except in the immediate aftermath of world wars. When the dust settles, I suspect most companies that have historically prioritised dividend payments will quickly return to paying regular dividends, albeit the quantum may be rebased in some cases. Equity in business has a cost of capital and that is expressed through dividend payments. History teaches us that companies who thrive longer term have capital discipline in their DNA.
Given the scale of government indebtedness, interest rates look set to remain at rock bottom levels for the foreseeable future and yield curves will be heavily managed by governments. Equity investment combines a number of attractive features, such as good liquidity, inflation hedge and income, and therefore will remain an important asset class for investors, albeit one that can be volatile.
Within the active global equity funds RLAM are positioned with lower financial leverage than the index and believe that this will be increasingly important over the next few weeks as some business struggle to generate cash in the current crisis. While market swings are violent there remains good liquidity in large cap equities and RLAM continue to look at further recycling capital into those stocks that have over reacted based on flows or forced sellers.
The RLP Propery Fund was suspended on Monday 30 March 2020.
Sentiment in the real estate sector is contingent on many factors, but the underlying health of the economy plays a fundamental role.
A significant slowdown is now underway. Prior to this crisis, values of retail properties were already in decline, with the other main market sectors stable or rising, off the back of the December General Election result. However, across most sectors we now expect to see an increase in property yields and for asset valuations to fall, as a combination of investor uncertainty and near term occupier stress take hold. RLAM are no longer proceeding with a number of investment transactions and expect others to take stock and pause, whilst the ramifications of this global crisis become clearer.
Investment volumes will therefore be suppressed. There are signs that some private equity funds are still active and seeking opportunities, particularly in the industrial sector. Recent deals saw transactions completed last week achieve, and even exceed, asking prices. This demonstrates the view that despite current uncertainty, key industrial locations could benefit from the growth in online and last mile logistics. However, we expect these types of deal to be in fairly short supply.
As social distancing intensifies following the government’s soft lockdown approach, the effects are already beginning to appear in economic indicators. One recent example, particularly pertinent to the property sector, saw this week’s statistics indicating that certain London retail destinations have seen a 90% decline in footfall year-on-year. This is inevitable under the circumstances, but the effects are only beginning to emerge.
We are seeing a significant number of requests for a quarter’s rent concession from retail and leisure tenants. These range from requests to pay monthly rather than quarterly, to occupiers seeking a rent free period. This has now spilled out to other sectors, with industrial based tenants requesting similar concessions, particularly those supplying restaurants and high street stores. Hotel operators are another area of concern. Without doubt, some operators won’t survive and we’ve received multiple requests for landlord concessions and assistance. This situation will separate those well-run companies with robust balance sheets from the rest, a matter requiring considerable oversight over the coming weeks/months.
RLAM have been proactive in engaging with our tenants and are trying to take into account the individual circumstances of each occupier, keeping in close contact with managing agents and landlords to gauge the stance others are taking, and understand themes as they emerge.
These risks to near-term income alongside weak investor sentiment, will lead to a sudden re-pricing of UK real estate. It is difficult to judge how far values will fall off the back of limited investor demand, and occupier pressures, combined with record low market sentiment; but it could be dramatic, in both quantum and speed. We would hope that in the short term, rents recover and yield increases reverse, as confidence returns and people revisit shops and leisure destinations – potentially just as dramatically on the upside.
The RLP Propery Fund was suspended on Monday 30 March 2020.
Parallels with the global financial crisis are obvious, but perhaps the key difference we’ve seen is the speed at which this happened, with the sell-off all concentrated in almost two weeks as opposed to gradually over a couple of years. The speed of response is also very different.
This week the focus has been very much on managing liquidity. The tone of the market definitely improved later in the week, with liquidity improving. The Bank of England helped matters, particularly with the bonds that would be bought under the programme (utilities, housing associations).
No one knows how long this will last, but the economy will eventually recover. In retrospect, this could look like an attractive buying opportunity, and RLAM are selectively taking advantage of wider spreads in the number of portfolios.
The main focus in these markets is liquidity, making sure there is capital in the funds to meet any client demands or to take advantage of opportunities.
The unfolding Covid-19 situation is having a major impact on high yield markets particularly the energy and leisure sectors which were the first to suffer as concerns regarding the coronavirus spread and oil supply issues increased. As the severity of the situation became more evident, the sell-off extended across nearly all asset classes and sectors. The largest detractors were driven by cyclical and leisure credits as well as the most liquid credits. The leisure and cyclical credit declines reflect the first order impact of the corona virus on demand and growth concerns. With respect to liquid credit, volatility increased markedly largely due to investors seeking to fund liquidity needs. RLAM are comfortable with the holdings and the team is constantly reviewing the liquidity and credit profile of these as the situation develops globally. They believe the sell-off in high quality liquid credit will create opportunities.
As the COVID -19 virus continues to spread across the globe, we have seen significant action from central banks and governments globally. The amount of stimulus that has been made available to organisations around the globe is extraordinary. The interesting aspect is that when markets initially continued to deteriorate, the response was to stimulate further with the UK government going as far as backstopping the entire UK workforce (self-employed excepted as at time of writing). In the last 24 -48 hours, despite the UK lockdown, we have seen some encouraging signs from China, Wuhan and even Italy in the control of the virus. This news, combined with the stimulus, is starting to help markets find a base and in the last few days market liquidity has improved slightly.
Governed Retirement Income Portfolios
Please see our latest performance.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.
“We have experienced significant market moves over the last few weeks which we expect to continue in the short term. Whilst this uncertainty is a serious concern we can confirm that these scenarios remain with the ranges we model as part of our governance and oversight process for the Governed Range. Our view is that the diversified nature of the portfolios are a benefit during times of market stress and provides us with the flexibility to respond and adapt to opportunities as they arise. We are following our enhanced monitoring process throughout this period and are holding regular calls with senior leaders across the Royal London group and the investment management teams at Royal London Asset Management. This allows us to monitor market reaction, the impact on our investment strategies, customer behaviour and cashflows. We will continue to keep a close eye on economic indicators and market sentiment factors which inform our models and review any impact on our longer term assumptions. Rest assured that if these are triggered we will take action to adjust our strategic asset allocations which set the guidelines for our tactical positions. This will be done through our governance process and will follow recommendations from our Investment Advisory Committee. “
Our multi asset portfolios went into the coronavirus crisis overweight equities in view of broadening signs of recovery in the world economy early in 2020. Stock markets have since dropped sharply as counter measures to slow the outbreak resulted in a sudden decline in economic activity and uncertainty over both the depth and duration of the crisis. We have managed equity exposure lower, buying during the initial sharp sell-off and selling after the US emergency interest rate cut a week later when markets bounced. Since then we have been selling rallies but we retain a small overweight in stocks as investor sentiment is extremely depressed – more so than in the Lehman crisis of 2008 according to our proprietary indicator; valuations are more attractive; and a broad range of stimulus measures has been announced.
We were neutral commodities when the oil price fell on supply disagreements between Russia and Saudi Arabia. We remain overweight high yield bonds, particularly short duration high yield, as we expect the asset class to be more resilient than stocks over a temporary period of economic weakness. We remain broadly neutral on UK commercial property where we see diversification benefits relative to equities.
We will continue to manage risk over this volatile period by selling rallies and buying again when sentiment is depressed. We may not yet have seen the low in equity markets as signs of the virus spreading across Europe and the US are likely to dominate the news. However, we expect a sharp recovery later in the year when shuttered parts of the world economy are re-opened and consumer confidence picks up again.
RLAM’s investment process has weathered crises before and did well over the Global Financial Crisis. We expect this shock to be more short-lived than in 2008, with an eventual strong bounce back in economic activity and an active approach to tactical asset allocation will be crucial. When recovery comes, it is likely that RLAM will add to equities again due to the additional stimulus in the system.
“Stock markets have declined sharply in reaction to the containment measures designed to delay the spread of coronavirus. This demand shock has developed so quickly that it’s hard to estimate the impact on the economy or the depth of the downturn, economic indicators show the global economy may have already brushed recession thresholds. In our view, the virus’ spread, alongside containment measures, will elongate this global downturn to at least a two quarter period for the global economy. While China’s production is coming back on line, weaker demand from the West now also threatens China’s recovery. To prevent a full scale global recession, policy responses are key. While containment measures can help fight the spread of the virus, economic policy can help mitigate the economic impact, ease financial conditions and prevent longer term damage to a country’s productive potential. We are seeing such policy support step up.
Last week we saw a wide array of policy measures announced, adding to the rate cuts from the US. This has included more funding for tackling the virus itself (e.g. for health services or vaccine research), more outright stimulus in the form of additional quantitative easing from the European Central Bank and the 50bp rate cut announced by the Bank of England, and more ‘bridging’ measures to help companies, and households, access funding and reduce their costs as cashflows become challenged during this outbreak. These measures can help prevent significant long-term economic damage, including companies having to permanently lay-off workers. Examples in the past week include enhancing the government-subsidised short-time working scheme in Germany and the UK government refunding the cost to SMEs of providing employee statutory sick pay (related to COVID-19). We’ve also seen the announcement of facilities like the UK’s new term funding scheme, from the Bank of England (BoE), which includes additional incentives for banks to lend to SMEs.
This crisis clearly has some way to go, but global policy action is already substantial and taking place before the impact of the crisis is even visible in the data of many major economies. That bodes well for the eventual recovery.”
The abrupt sell-off over the last couple of weeks has wiped out the positive equity market returns gained during 2019 and the start of 2020. Market losses were led by the energy sector which fell almost 30% in the week following the Saudi Arabia decision to increase oil production. Financials were also pressured, with earnings power diminished by rates cuts and the risk of loan losses increasing.
Markdowns in markets have shown limited discrimination, likely being driven by program trades. This gives the fund managers in our active strategies’ opportunities to stock pick using their bottom up investment process. Positions were moved more defensive when the downturn started and following some extreme price movements exposure to cyclicals were added. Generally, the active equity funds are positioned with lower financial leverage than the market and this will be increasingly important over the next few weeks as some business struggle to generate cash in the current crisis.
While market swings are violent there remains good liquidity in large cap equities and the fund managers have added to positions following any sell off.
In terms of the implications for the UK commercial property market, it’s still premature to draw strong conclusions about the virus’s impact and so far, we have seen minimal impact. Direct property is not subject to the same volatility as the stock market and it tends to be slower moving and rental income doesn’t swing wildly from day to day.
As an asset class, property is inherently illiquid in comparison to the stock market. Transactions take considerably more time to complete and valuations are less frequent, typically monthly or quarterly. Certainly, if the virus has a sustained and material impact on the broader economy, it will have feed-through impacts on property as well. We expect to see a significant slowdown in assets being brought to the investment market. Deals are still being completed at present and there remains an appetite for good quality stock, particularly in central London. It is likely that travel restrictions will lead to a temporary withdrawal of overseas buyers from the UK market and we could see domestic investors step in and exploit lower levels of competition. Were the crisis to worsen, sentiment could turn quickly and all positions are being monitored carefully.
The biggest impact is likely to be felt in the hotel, leisure and retail sectors. In particular, the retail sector which is already undergoing structural upheaval with many retailers rationalising store numbers in the face of online competition and weak sales growth. Any form of recession will place more pressure on beleaguered operators and could exacerbate failures. The fund remains overweight in office and industrial sectors which is expected to be more resilient with tenants better able to ride the storm.
Over the longer term the outlook remains positive. In a low yield environment, real estate income could look more attractive, and London is competitively priced in relation to other major world cities.
The sterling investment grade funds have generally underperformed slightly in recent weeks. This reflects an underweight position in supranational bonds and an overweight position in subordinated financial bonds (banks and insurance). While banks are not at the epicentre there is fear that the economic impact will have a significant negative impact in the medium term. Partially mitigating these effects, secured bonds have generally performed well, while the underweight exposure in consumer and industrials sectors has also been positive. The funds have minimal exposure to travel and leisure companies and small positions in the energy sector which has been impacted by the fall in the oil price. The exception is the Sterling Extra Yield Fund, which has exposure to a diversified range of oil production and service companies (mainly Scandinavian and UK – with low US exposure). Liquidity is a real focus at times of market stress and this is being monitored closely. The fund managers at RLAM have invested through recessionary periods before and will continue to follow their principles of investing to conserve investor’s capital with a focus on credit fundamentals.
The high yield markets have viciously turned in the last few weeks and the funds have declined in value commensurately. Despite the move in markets RLAM don’t expect a decline in quality and believe that over time the risk-adjusted returns will be attractive. This is a market to preserve capital and RLAM’s approach in the credit space should benefit performance. Exposure to travel and leisure companies is small at 2% and this is in companies with robust cash balances which should get them over the next six month period. The fund has less than 2% exposure to the energy sector in issuers who have strong liquidity and refinancing options. The impact on financial confidence will increase as spreads rise and refinancing risk rises and RLAM’s preference for good companies that can refinance even if spreads increase should support performance. Current holdings are robust, there are no liquidity concerns and the funds are being positioned to navigate a short-term liquidity crisis and potential recession over the medium term.
Over the course of the week we have seen significant volatility in government bond markets, unlike anything we have ever seen. Central banks have been proactive with an emergency rate cut by the BoE combined with a large fiscal package in the Budget. The ECB and Fed also added stimulus through additional QE and further rate cuts. Due to the magnitude of the moves in government bond markets, liquidity has been difficult. We have seen spreads widen in general however due to the average size of our trades and our relationship with investment banks we have been able to trade across all markets at sensible levels in the context of market conditions.
The government funds have generally been running neutral duration and so volatility of performance has been low versus the benchmark. The main areas that have impacted performance have been those funds which have exposure to AA rated corporate bonds. These spreads have widened which has had the largest impact on performance for some gilt funds. We have been tactically trading duration to mitigate the impact of spread widening where possible. Most of the gilt and index-linked government bond funds are at or around benchmark on a year-to-date basis. The Absolute Return strategy had a strong start to the year but has given back some performance in the last few weeks. It nevertheless continues to provide good diversification versus bonds and equities in this environment.
Governed Retirement Income Portfolios
Please see our latest performance.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.
As of 11pm on the 31st January, the United Kingdom were no longer members of the EU and so began the transition period. As a result, February began on a positive note with UK & Global markets continuing to demonstrate strong returns - but this was somewhat short-lived. The belief that the coronavirus was under control was well and truly dashed with the month’s early gains being wiped out in a matter of days. Talks of the virus mutating, suspension of trade and borders closing sent markets into a tailspin. Global markets suffered their worst day in 2 years and UK stocks recorded their worst day in the last 5 years. The overall impact of coronavirus is still a moving picture, and whether this is indicative of a global market slowdown, or just a shock market reaction is yet to come to fruition.
We expect volatility to continue in the coming months with updates from the UK/EU negotiations, as well as developments across the Atlantic in the US Democrat presidential candidate campaigns.
We are still overweight equities in our portfolios and remain broadly constructive on the longer-term prospects for stocks.
There has been glimmers of hope for Sterling (£) of late with the prospect of increased government spending as well as a spike in response to Sajid Javid’s resignation mid-month. Consumer goods prices rose for the first time in 6 months in January and with the backdrop of uncertain EU negotiations as well as global concerns such as coronavirus, gilt yields remain low and Investment Grade and Global High yield bonds have gone overall pretty much sideways throughout February.
We remain overweight high yield and corporate bonds and have reduced our underweight position in Gilts.
2019 has seen a lot of uncertainty in the UK Commercial Property space due to the lack of an agreement over Brexit. This is reflected in the performance of property year date which has delivered a similar return to cash as rental income has broadly offset capital depreciation.
We’re currently neutral Property in our portfolios but prefer industrial property over retail which continues to slow.
In the context of all the volatility described above, investors have been looking to gold as a “safe-haven” investment, with gold returning over 4% in the last month. However, from a higher-level perspective, the coronavirus has had a varied impact on commodities, with agriculture related commodities and oil being hit negatively.
We are neutral commodities within our portfolios.
Global equities have returned around 5% over the past few weeks with the US leading the way.
We finally saw the first phase of a US/China trade deal signed which will lead to tariffs on Chinese goods entering the US being reduced along with China purchasing US agricultural products. Markets were expecting this so didn’t react to the news, however we’ve seen steady growth over the past few months since news of the deal emerged.
Despite inflation undershooting targets, UK markets continued to grow as Parliament voted through the EU Withdrawal Bill meaning we will officially be leaving the EU at the end of the month. Current trading arrangements will remain in place until the end of 2020 as the UK Government attempts to agree new deals with both the EU and the rest of the World. We expect market volatility to increase in the coming months as updates are released on these talks.
We remain overweight equities in our portfolios although we have taken some profits after recent strength, but remain broadly constructive on the outlook for stocks.
UK Gilt yields increased for the third month in a row off the back of the UK election result and a clearer outlook on Brexit. Investment Grade and High Yield Bonds outperformed Government Bonds over the month and produced positive returns.
We’re broadly neutral in both Gilts and Corporate Bonds and slightly overweight High Yield with our preference being in shorter duration.
2019 has seen a lot of uncertainty in the UK Commercial Property space due to the lack of an agreement over Brexit. This is reflected in the performance of property year date which has delivered a similar return to cash as rental income has broadly offset capital depreciation. We’re currently neutral Property in our portfolios, but have a preference for industrial property over retail which continues to slow.
Commodity returns were positive in December with all sectors showing growth due to optimism over the US/China trade deal, with agriculture products hitting their highest levels since Summer 2018. We are currently marginally underweight commodities across our portfolios.