What is happening?
There has been a significant improvement in the equity and debt markets in the last few days. Tuesday saw one of the biggest equity market rallies of all time, accompanied (or maybe caused by) a tightening of credit spreads and a return to more orderly market conditions. Whether this is a blip in a downtrend, or a sign that the worst is behind us, will only be known for certain in the weeks to come, but it is the view of the sustainable team that the worst (in market terms) may be past. Liquidity has been dealt with by central banks, solvency by governments and capital markets (more on this later), and the virus by the current lock down seen across the world. China continues to show us the way out of this, having dealt with the virus first, and has seen no new cases for a number of days now. In total China has had 81,285 cases and 3,287 deaths out of a population of 1.4bn, and much of the country is now back to work (see country breakdown at https://www.worldometers.info/coronavirus/).
We are starting to see companies issue trading updates to inform investors of the impact of this crisis on their businesses. Almost universally dividends are being withdrawn; no company intending to access government support can justifiably pay out dividends to shareholders. These dividends will be reinstated in due course. Some of these companies are reporting revenues down by 80-100%, completely unprecedented amounts, as the lockdown takes effect. A number of them are asking shareholders for funds to tide them through. This will continue as companies come to grip with their circumstances. It is all orderly though. The corporate sector is extremely adaptable and capital markets are open to fund businesses who need it.
What will happen next?
We feel that the rate of growth in infections will fall in the coming weeks. The lockdown, if adhered to, will work in reducing social contact which is the main cause of the spread of the disease. We could then see the gradual return, like we have in China, to normality. This could in turn be accompanied by a rapid return of economic activity, particularly on the consumer side where we may all be trying to book holidays after months of disruption. It is likely to be very hard to get a flight anywhere in August (admittedly this needs lots of things to go our way) if not booked in the next few weeks – as airline capacity has been removed and we will all still want our holidays! This return to normality will be a psychological boost for both individuals and markets. Alongside huge central bank and government support, this could result in a very strong environment for risk assets. In my view there is a small chance lockdown doesn’t work, or that the virus evolves, but we continue to believe that the odds are strongly in favour of humankind, and therefore investors.
We have to understand the cost of all the government stimulus. This will be expensive to tidy up. There are some positive though. First, governments can borrow cheaply – 10-year gilts yielding just 0.4%. Second, governments can spread the cost over a long time. 20% of GDP seems a lot in one year, but 2% over 10 years less so. If this is the biggest crisis of our generation, 2% of our income each year for 10 years to solve it is very manageable.
What are we doing?
We are still active, but not as much as last week. It is likely some of the share prices we saw last week we will not see again for many years, but there is still selective value. Last week was a once in a decade opportunity to enhance the long-term reward potential of our funds for a relatively little risk. We can only do this, to the extent we have, when we are operating in panicked markets, which as of today, appear to have receded. This week we are still finding good value, buying back into Compass in the UK and adding to Intuit overseas. We have also added to existing holdings such as SSE and Rentokil – all at highly attractive prices. We think opportunities will continue to lessen as markets recover, but are hopeful an occasional market sell-off or company issue will give us further opportunities to make investments.
How have we been performing?
The funds are generally performing well relative to peers. We feel we insulated capital well on the downside, and we are firmly focused on maximising the opportunity ahead of us. The mixed asset funds, World, Diversified and Managed Growth, are very well positioned to benefit from a return to growth in the economy and remain overweight equities. Our single asset equity funds, the UK Leaders and Global Sustainable funds, have outperformed strongly in the downturn and we are hopeful some of the changes we have made in the last few weeks will benefit them in the upturn.
Investments have an interesting characteristic in that generally the cheaper they get the less people want to buy them. Very few (no?) other consumer purchases have that characteristic. We think our role, on your behalf, is to carefully move in the opposite direction. When investments we want to own get cheaper we will manage our risk and where appropriate buy more of them. It is impossible to know if we will get another sell-off for sure, but if we do and investments get cheaper we hope they will become more attractive to you too.
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.