Markets started last week (the week of 4 May 2020) quite weak after tensions between the US and China escalated, but went on to a strong finish, despite the less-than-reassuring economic data releases.
We had further movement in terms of lockdowns being lifted last week: in total, 21 US states have started to ease lockdown measures, however, as of Thursday 7 May, 10 of those did not meet the White House guidelines for reopening, raising concerns that some are opening too soon.
Meanwhile in the UK, Boris Johnson has set out a three-stage plan to get Britain back to work, abandoning his “stay at home” message and holding out the prospect that schools and parts of the economy could start to reopen before the summer, if certain milestones are met.
The friction between the US and China last week came on the back of the statement by Mike Pompeo that there was “a significant amount of evidence” that COVID-19 had started life in a Chinese lab. This claim was later rejected by Beijing, who instead accused the US of being the origin of the virus. To escalate things further, Trump also threatened to “terminate” the phase one deal, with China falling behind on agreed purchases of US goods. But on Thursday, all appeared to be well after an announcement indicated that trade talks between the two countries were still on track.
In terms of economic data, the weekly initial jobless claims came in at 3.2 million on Thursday 7 May, which was down from the 3.8 million the previous week. This now brings the total number of initial claims in the last seven weeks to 33.5 million. The huge level of rapid unemployment was confirmed by the US jobs report, out on Friday, where non-farm payroll employment fell by 20.5 million, and the unemployment rate jumped to 14.7%. It is also worth noting that the average hourly wage increased over the month, signalling that it was the lower paid individuals who have lost their jobs.
We had quite a few purchasing managers’ index (PMI) readings out last week. Eurozone construction and composite numbers were weak, falling to their lowest level since records began, while China’s services PMI stayed in contraction territory for the third straight month.
The Bank of England (BoE) met last week leaving rates unchanged and deciding not to launch any new stimulus packages. Its governor, Andrew Bailey, did however warn that GDP may fall as much as 30% in the first half of the year, and signalled that the bank could expand stimulus as soon as next month if needed. We also heard from Christine Lagarde of the European Central Bank (ECB), at the State of the Union Conference, urging the Eurozone to launch a joint fiscal stimulus and adding that it needed to be “swift, sizeable and symmetrical”.
For the first four days in May, equity markets were a little softer, before Thursday 7 and Friday 8 May, when these two days pushed markets marginally into positive territory.
As the Q1 earnings season continues, it would be fair to say there have been more positive surprises than negative ones. Of course, that partly reflects companies’ management steering analysts lower ahead of the results when they were all busy cutting forecasts, but the positive news has been especially true in the technology and healthcare sectors, which seem to be getting through the COVID-19 crisis very well, making them the two most resilient sectors year-to-date. This has also helped the US market outperform as it has a bigger weighting in these sectors than other regions.
Also, of course, it’s worth reflecting on the fact that these results are to the end of March and so were only partially affected by lockdowns. It will be the Q2 results when we really start to see the full impact of the collapse in activity.
Meanwhile, companies have been understandably reticent in talking about their prospects for the rest of the year, with many choosing not to give any guidance at all given how much uncertainty exists right now.
In terms of styles, at the highest level, cyclicals have generally been a bit weaker over the past few days, with defensives and stable earners extending their year-to-date outperformance. Growth stocks continue to outpace their value counterparts.
In fixed income, government bonds generally softened a little along with conventional investment grade credit, while high yield has had a slightly better time of it in the first few days of May.
What’s happening in portfolios?
The market trends in cyclicals versus defensive, growth versus value, and large caps versus small cap stocks are reflected in our equity portfolios, given we favour quality stable earners. We have a strong bias towards robust companies that can survive whatever is coming down the track and, if needed, have access to capital markets. That’s why we have sold out of small caps and drastically cut those investments with a bias towards value and cyclicals.
We continue to believe that any recovery will be protracted, and it will be a long time before economies are ‘fully’ back, with bankruptcies expected among the weak players in troubled sectors.
Our short duration strategy in fixed income has been positive so far in May.
In our property investment trust, the value of shares has fallen -14% this month on thin volumes, with no news prompting the drop, although the value was up a similar amount in the last few days of April, so this has just been a retracing of earlier steps. Meanwhile, one of our healthcare investment trusts confirmed that it is on track to pay its forecast dividend of 6.3p in 2020, with both retaining high occupancy levels, and operators paying their rents. Given care homes could be viewed as essential infrastructure, we see them continue to benefit from the long-term rising demand as the population ages.
Out of the 11 investment trusts we use across all our portfolios, nine are confident their dividends will be delivered. Of the two to postpone, both are very cash flow positive, and we hope to see the restoration of some kind of dividend at some point later this year.
Events this week
We expect that more countries and states will move towards lifting lockdowns.
In terms of economic data – starting with the US – this week sees the release of April’s industrial production, retail sales and consumer price index figures, as well as the weekly jobless claims on Thursday 14 May. Meanwhile in Europe, there’ll be the first look at Q1 GDP for both the UK and Germany, as well as the second estimate of the euro area number. Finally, attention will also be on China, where data for industrial production and retail sales comes out on Friday 15 May.
No major central banks are meeting this week but we will hear from BoE governor, Andrew Bailey, as well as from some spokespeople of the Federal Reserve, while the ECB will be publishing its economic bulletin.
Brexit negotiations continue throughout this week, which come after some difficulties in the previous round in April. Finally, earnings season will start to wind down, with only 20 S&P 500 companies reporting.
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 +44 (0)1624 645000.
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Based in our Isle of Man office, James is responsible for delivering the end-to-end investment management process, overseeing the implementation of the Nedbank Private Wealth house view within our discretionary managed portfolios, and for developing our investment proposition.
He has over 18 years’ investment experience and has been responsible for the Nedbank Private Wealth managed discretionary portfolios since 2007. James holds the Certificate in Investment Performance Measurement from the CFA Institute.