Investment Comment April 2020

The first quarter of 2020 saw market volatility not experienced since the Global Financial Crisis. With many markets hitting record highs in February, the drawdown in March was sharp. Despite a rally towards the end of the month, many indices remain at or near multi-year lows, particularly in local currency terms. The speed and magnitude of the falls and the accompanying concern around market liquidity have been reflective of the unprecedented nature of the shock facing the Global economy.

Few markets or sectors escaped the volatility, as fears surrounding the economic impact of measures taken to suppress the spread of Covid-19 led to indiscriminate selling across asset classes. The Federal Reserve, Bank of England and European Central Bank all announced new quantitative easing programmes, shoring up liquidity in bond markets. Unlike prior programmes, investment grade corporate credit has been included in some central bank purchases, providing a boost to the sector. Huge fiscal stimulus has also been promised by governments around the world, precipitating a partial recovery in equities towards the end of the month. However, with the economic impact of ‘lockdown’ and the eventual human cost of the pandemic no clearer, we remain cautious in our short-term outlook.

UK markets were particularly hard hit as a result of significant exposure to Financials and Energy. The latter faced severe pressure from falling oil prices. Initially, political posturing between Saudi Arabia and Russia instigated one of the largest one-day price drops in history. As investors weighed the impact of reduced economic activity on demand, prices dropped still further, with Brent Crude ending the quarter down 62% relative to the start of the year. Such a profound fall should provide some disinflationary balance to the monetary stimulus measures put in place by the Bank of England. Companies exposed to travel and leisure were particularly impacted, as were financials. Over half of the companies within the FTSE 100 fell by more than a quarter YTD, with notable drops from Carnival (-73.1%), IAG (-65.6%), Easyjet (-59.9%) and RBS (-53.0%) amongst many others. The quarter proved a baptism of fire for Boris Johnson as Prime Minister as he invoked restrictions on the public not seen before during peacetime. The same can be said for Andrew Bailey as Governor of the Bank of England, with interest rates falling from 0.75% at the start of the year to an historic low of 0.1% and guidance given to banks to stop paying dividends.

In the US, large technology and pharmaceutical companies provided some dampening to market falls as work accelerates to develop a vaccine. Citrix Systems (+32.1%), Gilead Sciences (+16.9%) and Netflix (14.7%) all performed strongly over the quarter whilst oil-sensitive Apache (-83.9%) and cruise line Norwegian (-81.2%) brought up the rear. During March, the Federal Reserve announced a $300bn stimulus programme aimed at supporting the economy and ensuring ‘smooth market functioning’. Interest rates returned to record lows, falling from 1.75% to 0.25% during the period. Policymakers also passed an historic $2tn fiscal programme, including a $1,200 one-off payment to all American adults earning under $75,000 p.a.; a step never seen before. The USD has been volatile during the period, ranging from $1.15-$1.33 against Sterling and $1.07-$1.14 against the Euro.

In Asia, early signs indicated positive developments from early adoption of virus suppression measures, particularly in China. Although data from the region has been questioned, it would appear that strict controls have allowed a return to relative normality over a c.3 month horizon. The official manufacturing PMI for March read 52.0 following a record low figure for February of 35.7. Although encouraging, we anticipate further volatility and uncertainty before a confident recovery can be called. In Japan, the postponement of the 2020 Olympic Games dealt a further blow to an economy already faltering from weak consumer sentiment and consumption.

Emerging Markets have thus far been relatively less affected by Covid-19, although this is unlikely to remain the case. Many emerging economies deal more frequently with significant shocks brought about by extreme health or climate emergencies than developed counterparts. However, with political systems perhaps more vulnerable to the spread of fear, investors need take note of developments.

It has been a rollercoaster ride for investors since the beginning of the year and we anticipate continued volatility and uncertainty going forward. Indices measuring market volatility remain highly elevated and huge unknowns around the length and depth of this economic shock remain. We would not be surprised to see further market drawdowns as the impact of these extreme circumstances on companies becomes known. Governments and Central Banks have provided much needed stimulus and have made clear that they will do all in their power to support economies. However, the long-term implications of these type of commitments – particularly on the fiscal side – are as yet unknown and such measures are not sustainable for long periods of time. We encourage clients, as ever, to ensure that they have sufficient liquid assets to meet their short to medium term spending commitments. Equity investments should be viewed with a long-term horizon; in this context we see opportunities emerging from market sell-offs. We remain optimistic that well-balanced portfolios will recover quickly as economic uncertainty eases. Above all, we hope that clients and their families will remain safe and well during these worrying times and look forward to a return to normality soon.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.