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8 June: weekly investment update

5 mins
David McFadzean, 
June 2020
8 June: weekly investment update

The week of 1 June saw markets provide good news. The focus continued to be on the easing of lockdown measures, despite the unrest across the US. Health experts have warned of a possible spike in COVID-19 cases 14 days after the start of the protests. This potential spike has almost certainly not currently priced into markets.

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On Wednesday 3 June, the German Chancellor, Angela Merkel, announced a €130 billion package of tax cuts and spending increases to bolster demand and address some of the country’s underlying economic weaknesses. Meanwhile, the European Central Bank’s president, Christine Lagarde, announced plans to increase the central bank’s pandemic emergency purchase programme by €600 billion last week, in order to counteract what she called an “unprecedented contraction” in the Eurozone economy.

Following three days of virtual talks, EU and UK officials said that the two sides remained poles apart on some core issues, including future alignment of business regulations and access to British fishing waters. The next round of talks is due to take place later this month with Boris Johnson expected to join the negotiation table, alongside other senior EU officials.

In the US, the weekly initial jobless claims came in at 1.9 million on Thursday 4 June, bringing the total number of initial claims in the last 11 weeks to almost 43 million. We also had the US unemployment rate report on Friday which showed May’s unemployment rate falling from 14.7% to 13.3% as US employers unexpectedly added 2.5 million jobs in May – a result no-one predicted. While the US unemployment remains well above the peak following the global financial crisis, markets rallied on the hope that the US economy may bounce back much faster than expected.

We also had quite a few purchasing manager indexes published last week, which have started to recover from the previous month, but are still sitting in contraction territory e.g. the final reading for May’s IHS Markit services purchasing managers’ index for the UK increased to 29.0, compared to 13.4 in April.

OPEC+ members met on Saturday 7 June and agreed to extend production cuts for a further month. This led to Brent crude trading higher at around US$42 a barrel on the morning of Monday 8 June.

Ove the first four days of the week, the MSCI AC World rose 2.4% in sterling terms, and 4.8% in US dollar terms. Europe ex UK, Emerging Markets, Asia ex Japan and the UK all outperformed between 2.5% to 3%, while the US and Japan both underperformed by up to -1%.

Value (+2.85%) outperformed growth (-0.11%), and also the more cyclical small capitalisation stocks (+2.98%) beat large caps (+1.09%). On a sector level, communication services (-0.25%), consumer staples (-0.32%), healthcare (-2.76%) and information technology (-0.30%) underperformed. However, utilities (+0.64%), materials (+2.87%), consumer discretionary (+1.84%), real estate (+2.79%) and industrials (+3.60%) outperformed, with energy (+5.06%) and financial services (+6.32%) leading the way.

 

What’s happening in portfolios?

It is really hard to state that we participate in a free market when it is being so manipulated by the central banks. It means that the viability of traditional savings and investment options are at odds with the banks’ management of monetary policy.

Despite being overweight non-US stocks, and in particular emerging markets, our overall underweight equity position has held back performance, although it has been reasonably solid across the board in the first week of June, both in an absolute and relative sense, and we have begun to claw back the drops experienced by portfolios from the end of February onwards.

Our focus on shorter duration government bonds again rewarded as yields rose and prices fell, with UK gilts particularly weak – an asset where we have no exposure. Our investments in corporate credit were also supportive.

Property securities were also reasonably firm, with our global real estate investment trust performing better than its peers, and which went hand-in-hand with the small outperformance in our care home funds. This confirms our view that the continued expectations for a 6-7% yield, with annual inflation linked rental uplifts, is a good investment in a world where the UK and US base rates sit so close to zero.

In terms of the remaining alternative investments, it was a mixed bag, apart from our songs fund, Hipgnosis, releasing great Q1 results (+17.7%), due to the growth in streaming, as well as the strength in the US dollar given 80% of their revenues is in that currency.

We believe that our positions within bonds (short duration and long credit), property and alternative investments may be just as important in driving performance as higher equity weightings given we remain cautious about the road ahead. We continue to constantly weigh up the balance of probabilities to see where we can add to portfolios for longer-term rewards while mitigating the risks.

 

Events this week

The US will publish its inflation reading on Wednesday 10 June, and we will also get a look at the weekly initial jobless claims for last week (ending 6 June). The Federal Reserve’s latest monetary policy decision is also on Wednesday, with the chairman’s subsequent press conference giving insight into their latest thinking.

In Europe, April’s industrial production readings will be published for the Euro Area and Germany, along with April’s UK GDP reading. The ECB’s president appears before the European Parliament’s Committee on Economic and Monetary Affairs on 8 June stating that it remains “fully committed” to its mandate.

The 1 July deadline for the UK to decide whether to extend the transition period do not leave much time to make substantive progress on a number of issues. Given the current state of the UK economy, a hard Brexit will be difficult to manage, and while sterling has been reasonably firm of late, it may see another period of weakness. In such a scenario, our international focus could well add value relative to other wealth managers with a larger bias to the UK.

Clients of Nedbank Private Wealth can get in touch with their private bankers or relationship managers directly to understand how their portfolios are responding to market events or call +44 (0)1624 645000.

If you would like to find out more about how we can help you manage your investments, please also contact us on the same number to understand how we might manage your money.

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David McFadzean

David McFadzean

Head of Wealth Management

David is responsible for spearheading the growth of our wealth management business across the company’s international jurisdictions. He leads our teams of private bankers and specialists responsible for fulfilling our purpose of protecting our clients, advising them with integrity and making their lives easier. Prior to taking on his current role, David was integral in developing the bank’s investment proposition for high net worth individuals, trustees and investment consultants. He is also a member of the bank’s executive committee.

He has over 25 years’ experience working for global blue-chip companies in both London and Jersey, and providing investment solutions to a wide variety of clients around the world. David is a Chartered Fellow of the Chartered Institute of Securities & Investment and a Chartered Wealth Manager. 

 
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