The week of 11 May saw markets down, with US-China relations dominating the headlines.
At the start of the week, President Trump ordered the main federal government pension fund to end any investments in Chinese companies, stating that they pose a serious national security risk to the US. This was followed by further escalation on Wednesday 13 May, when US agencies warned that China was attempting to steal vital coronavirus research by hacking US groups studying the disease. By the end of the week, Trump warned that he could “cut off the whole relationship”, while he tightened export controls targeting Huawei.
Very little other news made the headlines other than the continuing coronavirus pandemic. The resultant economic downturn led to the latest US weekly initial jobless claims coming in at nearly three million on Thursday 14 May, half a million higher than expected, and bringing the total number of initial claims in the last eight weeks to 36.6 million. Against this backdrop, it can come as no surprise that the core consumer price index fell by 0.4% in April, industrial production fell by 11.2% and the latest retail sales figures showed a decline of 16.4%, although this number was worse than the 12.3% anticipated.
Markets, meanwhile, reacted negatively last week to statements by the Federal Reserve (Fed) chair, Jay Powell, who announced that “additional policy measures” may be needed from the US central bank, and other authorities, to prevent even greater long-term damage to the economy. Stating that the US risked an “extended period of low productivity growth and stagnant incomes”, Powell also ruled out a move to negative interest rates, after facing pressure from President Trump.
Brexit negotiations between the UK and EU were said to be in deadlock on Friday 15 May, with very little progress being made on the most significant outstanding issues, which include the environment, labour laws and fishing rights. More talks are set for 1 June, but while the deadline of 31 December seems far away, it is not when we consider that Boris Johnson has set a deadline of the end of June to allow the UK time to prepare to trade under World Trade Organization rules..
In terms of economic data, GDP numbers from Germany showed output falling by 2.2% in the first three months of 2020, while the latest UK monthly GDP figure fell by 5.8% in March – its fastest decline on record.
In the five days to Thursday 14 May, the MSCI AC World Index was down -1% in US dollar terms, but up +0.3% in sterling terms due to the weakness in the value of the pound. The best performing markets lately have been the US, Japan, Asia and emerging markets, with the worst being Europe and the UK.
The stable earning sectors of communication services, utilities, consumer staples and healthcare continued to outperform, while cyclicals and real estate underperformed. That is very much in line with our experience year-to-date, and we see the financial markets remaining discerning at the company level, and strongly favouring growth over value stocks, as well as large caps over small cap firms.
What’s been happening in portfolios?
The strong tilt towards corporate resilience within our equity holdings has helped performance.
In fixed income, it was a quieter week for this asset class. Yields remain incredibly low, with the German 10-year government bond currently yielding -0.54%, the French 10-year -0.03%, the UK 10-year +0.23%, and the US 10-year at +0.64%. Central banks will keep interest rates at record lows through a combination of their policy rates and their management of the yield curve via quantitative easing.
The difference between the yields on government versus corporate paper widened a little last week, with investment grade currently hovering around 2.2% globally, while high yield debt is in the region of 7.5% to 8%, showing the spread rising significantly as you move further down the list of credit ratings. There is a view, meanwhile, that as we will see a rise in the default rate from the current 2% to 3% towards the 10% mark, with recovery rates of perhaps around 50%, this gap in spreads is needed to pique interest among investors.
Property securities saw another tough market last week. The Global REIT Index is down around -25% year-to-date, reflecting the market’s worries about the ability of tenants to stay in business and pay rent. That said, one of our investments (with Resolution Capital) has seen a shift over the last few months and is outperforming by 11%, due to the emphasis on quality, cash flow, good management, and an aversion to high indebtedness. The exposure to data centres was also a good far-sighted call.
Our other property exposures, however, continued to remain weak with no obvious reason why, and particularly since news in the care home sector is improving in line with the increased support they are receiving with regard to staff testing and personal protection equipment supplies. As a result, we remain in close contact with the underlying managers, and while the suspension of the dividend in two of our investment trusts has damaged the market’s perception, we believe a dividend will be restored before the end of the year. Our other investment trusts posted positive performance.
Events this week
The US weekly jobless claims remains a closely watched figure, which is out again on Thursday 21 May. In the UK, data is due on unemployment, inflation and retail sales. We also have preliminary numbers for May from around the world coming out at the end of the week for the purchasing managers’ indexes.
The Fed chair will be speaking before the Senate Banking Committee on Tuesday 19 May, and then will give some opening remarks at the Fed’s Listens event on Thursday 21 May. The Fed will also be releasing the minutes from its April meeting on Wednesday 20 May, while the European Central Bank will be publishing its account of its most recent monetary policy meeting on Friday 15 May.
Finally, the US earnings season continues to wind down over the coming week, with 22 companies from the S&P 500 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.
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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.