A crisis without precedent
Health, economic and market-related news was moving at such a pace that most comment was out of date by the time of receipt. Stock markets had fallen by 20 to 30 per cent since the start of the year, bond yields had hit all-time lows, and it had become clear that an enforced economic recession was preferable to the worst excesses of the pandemic. What followed was a period of extraordinary intervention by governments and central banks around the world.
Our thoughts are with you
First and foremost, our thoughts were with our clients and their loved ones during what were deeply difficult and concerning times. We understood that money matters took a back seat, and we wanted to reassure clients that we had their investments in hand and that they could trust and rely upon us to continue to navigate through these volatile markets. Our staff were committed, and preparations were in place for remote working without any detriment to the ongoing management of investments.
Our robust investment process diversifies risk across a range of asset classes. While it cannot avoid falling prices, it is designed to withstand extreme market conditions. In October 1987, the FTSE 100 fell 23%, yet over the subsequent five years it produced a total return of 74.8%.
The fastest correction in a generation
At the time of writing, stock markets had fallen by 20 to 30 per cent since the start of the year. The UK and Europe were around 30% lower, while the United States and Japan were down approximately 20%, helped in sterling terms by their stronger currencies. Bond yields hit all-time lows as stock market volatility reached levels not seen since the great financial crash, and it became clear that an enforced economic recession was preferable to the worst excesses of the pandemic.
Interest rates across the developed world now stood at, or below, zero, and new fiscal measures were being introduced by the week as governments and central banks took unprecedented steps to maintain liquidity and ease the financial pain of individuals and businesses whose livelihoods were coming to an abrupt halt. The US dollar, Japanese yen and top government bonds performed well as safe-haven options, but gold, having initially hit its highest level since 2012, had fallen by around 12%, the suspicion being that there were forced sellers of liquid assets.
Both supply and demand are taking a hit
In the near term, measures introduced by governments or central banks were unlikely to arrest the fall in markets. This was partly because governments were, by necessity, enforcing an economic slowdown by curtailing all activity, and partly because the extended bull market was always going to end badly. The economics of supply and demand were both taking a hit: supplies of goods had been disrupted by the closure of factories and businesses, while discretionary demand had fallen as consumer lifestyles abruptly changed.
The financial measures put in place could not resolve the underlying problem, as they did in the financial crisis of 2008-09, but the hope was that they would ensure economic recovery as the world emerged from the pandemic. Stock markets do not cope well with uncertainty, and with the SARS recovery model no longer applicable, investors had no best guess of how severe conditions might become. Views varied as to whether a strong recovery might materialise later in the year, or whether the pandemic would prolong the constraints on normal activity.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Overvalued on the way up, likely to overshoot on the way down
During the final year of the bull market, we had felt that stock markets, with the exception of the United Kingdom, were significantly overvalued, yet they continued to rise. In a similar manner, we felt that valuations had now fallen to a reasonable level, but accepted that they were likely to overshoot on the downside as well. Corporate earnings would fall in the near term, the extent of which remained unknown, and there would be a hit to investment income. But investment models showed that valuations had reached attractive levels, and continued market volatility would provide opportunities to invest for good long-term performance.
Valuations have fallen to attractive levels, and continued volatility will provide opportunities.
On a more positive note, governments and central bankers had acted with a far greater sense of urgency than during the previous crisis. Measures were quickly announced to counter liquidity issues in the investment markets, and there had been multiple fiscal packages aimed at helping businesses and individuals. The hope was that these would keep a large proportion of families and businesses solvent and in a position to boost economic activity when the all-clear was given.
We entered the sell-off with record high levels of cash and moved quickly to begin deploying capital at levels we believed represented good long-term value.
Record cash entering the crisis
We had deliberately chosen not to reinvest the proceeds from the Woodford repayment, which meant portfolios entered the sell-off with elevated cash levels. When markets began to fall in late February, we sold the AXA Biotechnology fund across the higher-risk portfolios before the initial decline accelerated.
Phased buying at attractive levels
We deployed capital in two rounds of buying: the first investment was the HSBC FTSE 100 tracker, the second was to increase the weighting in the Vanguard US Index tracker. The total investment represented around 5% of portfolio value.
Cash held in reserve
Cash remained at a high level, ready to deploy as future opportunities presented themselves. We continued to believe that markets could retest their lows and that patience would be rewarded.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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