The week of 14 April saw mixed market sentiment as the impact of the COVID-19 weighed on corporate earnings results and economic data releases, while further talk of exit strategies and progress on a possible treatment provided some relief.
The European Commission put forward its roadmap to phase-out containment measures based on a decline in the number of cases, sufficient capacity in health systems, and appropriate monitoring. President Trump, meanwhile, announced that 29 states may reopen soon, following a three phase process, as long as a set of indicators were met e.g. a decline in cases for at least two weeks.
There was also some promising news of a potential treatment. Although it is still early days, the pharmaceutical company Gilead tested a drug on 125 patients in Chicago with severe COVID-19 symptoms, which led to all but two patients being discharged. This is important as an effective treatment would save lives and reduce the length of the economic shutdown – the effects of which are clearly seen in company earnings releases, with US banks in particular painting a negative picture through lower profits and increased loan provisions. Some filings, however, show some companies bucking the trend.
The focus again was on weekly filing for US unemployment benefits, with the latest claims increasing by 5.2 million in the week to 11 April, bringing the total of initial claims in the last four weeks to over 22 million – well over 10% of the whole US workforce. US retail sales fell by -8.7% month-on-month in March, far exceeding the previous worst decline (-3.9%) in November 2008.
China’s Q1 GDP fell -6.8% year-on-year, worse than the consensus figure of -6.0%, and China’s first economic contraction in over 40 years.
Despite the OPEC+ production cuts, oil prices fell again last week as demand for oil dropped more than supply. On Monday 20 April, they even dipped into negative territory in some very specific categories (West Texas Intermediary for immediate delivery) for the first time in history. However, oil price futures are materially above current spot levels, which have also been driven lower as oil storage capacity rapidly disappears.
Within equities, the more defensive sectors outperformed cyclicals, with healthcare and consumer staples continuing to do well versus the weakest areas of financials, industrials and energy.
More broadly, larger companies, as well as growth stocks, that are deemed high quality and low volatility have continued to outperform smaller companies that are seen as low quality and high volatility, as well as value shares. Clearly, and not surprisingly, investors are still favouring companies that can better cope with the economic downturn, e.g. better access to capital markets, and have stronger balance sheets.
Turning to bonds, most areas made progress last week, with the exception of emerging market debt. With both treasuries and credit having had a good week, the market is clearly saying there is still plenty to worry about, even if risk assets have been having a better time of late, while the US credit market is being helped by the fact the Federal Reserve has the power to buy corporate bonds through quantitative easing.
What’s happening in portfolios?
Last week saw performance slightly disappoint due to our property investments struggling for a variety of reasons. The press headlines on COVID-19 infecting care homes is particularly negative for sentiment towards our holdings, in spite of the strong fundamentals we believe our
investments enjoy. We expect this sentiment to be a short term factor.
Our high levels of cash also impacted performance, but we continue to believe this is prudent given the possibility of a second fall in the riskier asset classes. The equity portion of our portfolios were helped by our decision to cut cyclical and small cap shares in favour of higher quality dependable compounders. These could also be important if the downturn proves to be a more drawn out affair rather than the short/sharp V-shaped recovery some still believe in.
We continue to steer the middle ground, not least as there is still a lot of uncertainty. We believe this is no time for knee jerk reactions, or extreme views being acted on.
This week’s events
The key indicator being monitored remains the growth in infections around the world as that will indicate if countries are getting the virus under control and potentially how long they will remain in shutdown. While it is encouraging that governments are looking to end the lockdown, we continue to believe economies will struggle to fully reopen in the short term.
EU leaders will be holding a video conference this Thursday to discuss their response to the pandemic, and in particular with regard to the recovery fund. This meeting is important given the recent spread widening seen in Italian government bonds over German bunds.
The second round of Brexit negotiations takes place this week – also via video conferencing – with the UK government reiterating that they will not extend the transition period.
Alongside the weekly US jobless claims data published on Thursday 23 April, this week also sees the release of April purchasing manager indices from a number of countries around the world. These flag the levels of stock that managers across all sectors of the economy are buying to use in the month ahead – the lower the number (below 50), the bigger the contraction expected.
88 companies in the S&P 500 are set to report Q1 results. Meanwhile, close to 50% of UK companies have now suspended their dividends – not necessarily because they think they might fail, but instead as a precaution against the unknown. This figure should also be viewed versus the dividend suspensions in our investment trusts – with just two of the eleven putting them on hold.
We continue to see positive investment flows into our strategies given the long term numbers remain solid. However, if you would like to understand more as to how we see the backdrop for our investment approach developing, please sign up for our next 30 minute webinar which is on Wednesday 22 April at 12.30pm BST, or which can be viewed as a recording via the same link at a later time if that is more convenient for you. Please register for an account on our channel if you have not attended a webinar before.
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 as above or join our webinar to understand how we might manage your money.
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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.