The Return To Normal Investing
After re-entering markets with a defensive allocation earlier this month, following an in depth analysis of the data and a continued improvement in our medium-term market outlook on risk assets, over the coming days we will be implementing our return to investing more normally across the portfolios. In doing so, we will be redeploying cash into equity and non-equity assets across the portfolios as part of our staged re-entry strategy. This allows us to add to our current exposure at attractive levels, while complementing our existing exposure and increasing the level of diversification within the portfolios, putting us in a strong position moving forward.
Economic data on a global scale continues to deteriorate as the impact of the coronavirus-induced lockdowns becomes clear, however markets now appear to be looking past the sharply deteriorating near term economic data to focus on expectations for a recovery. With governments across the globe now starting to look towards setting a timeline for a reopening of their economies, most economists are now expecting to see a recovery in activity over the second half of the year, followed by strong growth in 2021. Expectations are that economic growth in 2021 will be bolstered by low international interest rates alongside continued support from central banks and governments as the global economy returns to the new normal following the coronavirus pandemic.
Over the week, we have seen governments across the world announcing their expectations for a relaxation of restrictions, providing more clarity on what an end to the lockdowns might look like. As we gain further clarity on this going forward, with more countries expected to make announcements over tomorrow and Friday, we see downside risks abating further going forward, with markets now able to base expectations for a rebound in activity on accurate timelines. Looking at the underlying health of key economies, economic health is deteriorating fast, however the relaxation of restrictions is feeding near term optimism that a recession would be relatively short lived as activity returns. With key economies now starting to look towards ending the lockdowns while central banks and governments remain committed to supporting growth and recovery, we no longer see a further sustained decline of 5%+ ahead, noting that we will continue to see high levels of intraday volatility.
For more information on the recent relaxation of European lockdown restrictions and what this may mean for Europe’s recovery, please see the attached Market Update.
With key data releases tomorrow expected to provide more insight into the health of underlying economies, we expect markets to continue to look past the negative economic data in the near term. As a result, we see markets gaining in the medium term, particularly given the levels of cash still remaining on the sidelines and ready to invest according to Bank of America’s most recent Fund Manager survey. It is our expectation that as the medical data flow continues to improve as the number of new cases and the reproductive rate of the coronavirus in key economies falls, we will start to see these investors returning to markets. Additionally, we expect high quality bond markets to continue to benefit as risks continue to abate following last month’s sell off and following recent central bank movements to shore up markets.
What does this mean?
As a result, should market movements confirm our thinking, after the data from Europe and the US is released on Thursday, we are looking to go straight to stage 3 in the staged allocation. This does not mean that all risks are removed at this stage, and we still expect to see some volatility in our portfolios in the near term, however at current market levels and as risks abate, we have an attractive opportunity to re-enter markets. As such, we will be increasing our exposure to multi asset and directional equity funds, in line with the below broad allocation splits.
What if we see a second wave of infections?
As we return to more normal investing, this means that if we do see a second wave of infection later down the line as key economies re-open, the portfolios would then be exposed to this risk should a vaccine not be available at this stage. That being said, as the chances of this remain largely unpredictable, this is a risk we must accept, as holding out until that point would mean missing out on a recovery in the meantime. We cannot hope to remove all risks from the portfolio, rather try to mitigate the effects of the significant risks as they arise. As we continue to dynamically manage the portfolios, if we do see a second wave later in the year which poses a significant threat to capital, of course we would be on hand to act swiftly as we have in recent months.
Overall, while we will start to see an increase in the intraday volatility within the portfolios as we return to normal investing, although markets may fall back from this point in the short term, it is our view that in three months from now, as long as there is not another significant rise in cases in Europe and the US as the lockdowns are lifted, markets will be higher than they are today, and this will continue for a number of years. As we are not day traders, trying to time the exact entry point to maximise the returns in the short term is not what we do. As long-term macro investors, we are now looking through short-term risks and reallocating as the medium-term outlook now looks much better than it did a few weeks ago. Fundamentally, we do not believe that there is a significant risk of the markets selling off structurally from here, and for that reason we should again be invested normally as risks that were prevalent in first three weeks of March have abated in magnitude.
Key Events We Are Watching This Week:
- Thursday: Chinese Manufacturing and Non-manufacturing data for April, European Q1 GDP and April jobs data, US jobs data for April
- Friday: US PMI Data for April
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets remained highly volatile over the week as the global economy grapples with the COVID-19 outbreak. After mixed intraday performance, all indices gained over the week as optimism continues to carry markets higher despite deteriorating economic data.
Following the implementation of our defensive portfolio earlier this month, the portfolios gained over the week, with the benchmarks gaining slightly more owing to their higher equity content. Over the coming days, we will be returning to more normal allocation within the portfolios, bringing intraweek performance more in line with the benchmark once again. The recent drop in portfolios and indices is hugely disappointing, however we remain optimistic about a growth pickup in the second half of the year, allowing us to regain lost ground.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 2011, Prince William married Catherine Elizabeth “Kate” Middleton at Westminster Abbey in London. Some 1,900 guests attended the ceremony, while another 1 million spectators lined the streets of London and an estimated 2 billion people around the world watched on television.
Have a great week and stay safe,
Jason & Gina