No sign of a market bottom yet!
It seems like a lifetime has passed since we began selling the equity side of the portfolios this time last month on the news that the number of active COVID_19 cases was starting to increase across the world. As we stand today, we are not alone in our extremely cautious stance. Many economists and fund managers are also taking a negative near-term view on equities, warning investors against the potential for negative developments in the coronavirus crisis. Last week saw a strong rally in equities on optimism that fiscal and monetary support measures might limit the fallout from the pandemic, however this optimism proved to be short lived, as companies continued to slash earnings outlooks as a result of the virus-induced lockdown in key economies. The full extent of the damage to corporate profits remains unknown, and as a result, due to the considerable risk of a further deterioration in the news flow on the medical, earnings, corporate balance sheet and economic fronts, we are not yet confident in allocating to any assets other than cash.
There is no doubt that the fantastic, unprecedented policy measures adopted and implemented by central banks and governments around the world have so far proved effective in preventing another financial crisis like 2008. At the same time, however, what we have seen so far is not enough for us to call a definitive bottom in this market.
For those of you who aren’t familiar with the most recent economic developments, some of the key headlines are:-
- At least 10m people in the US have now been laid off.
- 1m people in UK in last week applied for universal credit.
- Millions of people have now been furloughed.
- Global Manufacturing and Services activity data has this week hit lows last seen in 2008, with some activity readings the lowest they have ever been.
- Leading economists in most major banks are now expecting this to be the sharpest and worst recession ever seen.
- Banks and companies across sectors are cancelling dividends and buy backs – which have supported the markets for the last 18 months.
On a positive front, China seems to be returning to work, however with the rest of the world now in or starting to go into lockdown, the order flow to the region remains slow, with many orders now being cancelled or deferred. As a result, the little bright spot we observed in China at the start of the week is likely to begin to dim as global demand evaporates.
We all agree that things are likely to get worse in the short term as the lockdown period continues and the health situation worsens, however we do have to remember we are long term investors, and at the point when there is “blood on the streets” (metaphorically) and the situation has become worse, if history plays out, we will need to begin investing again in long term investments and rebuild our multi asset portfolios.
For all OCM clients, it is very unlikely that we will call the bottom of this market, as no one can, but we are watching the data and the news to try and buy back into the markets at a point significantly lower than that which we got out, therefore taking most of the pain out of the market capitulation. Please note therefore, when we do start to invest again (in coming weeks not months), it is likely that clients will again see some volatility in both directions.
To try and minimise that volatility, we have built 3 portfolios across the entire range in order to phase our re-introduction of risk assets into the portfolio, starting with a defensive re-entry, and adding more equity exposure over time in stages 2 and 3. The pace of the movement from stage 1 to stage 3 will depend on the news flow and the data. In essence, the faster the deterioration, the faster data comes out to reflect the true position of the global economy, the faster we can make decisions. The broad allocation of the three stages are as follows:
Using the well-trodden motorway analogy, in stage 1, we are back in car driving safely on the motorway on the inside lane, stage 2 is at normal speed within speed limits and stage 3 is driving fast in the outside lane.
In essence, what we are saying above is that as long-term investors, in the coming weeks, clients must accept that we will again be invested, and exposed to a level of market volatility. There is no guarantee that we will see positive returns immediately, but as long-term investors this has to be accepted as part of the long-term strategy. We will maintain safety for a little while longer as we want to see some visibility on the earnings side of the equation. We expect corporates to start announcing next week significant cuts in dividends and outlook, rather than waiting until their allotted point in the quarter, because corporates have to announce as soon as they expect a significant deterioration in the outlook so we expect that to come in thick and fast.
Overall, we remain content in the actions taken so far and where we are now given the data and virus developments. Going forward, we have a plan and are ready to implement stage 1 or an accelerated profile over the coming weeks as this situation unfolds. As a reminder, the conditions we are looking for are as follows:-
- We need to see the number of active cases in China continuing to abate and not show signs of free movement causing reinfection and rising infection rates. We continue to be encouraged by the recent data coming from China on this, however continue to watch closely.
- We need to see the active cases globally start to decline again.The active case figure is still rising by circa 10% daily, which is not good, but we are starting to see slowdown of new cases in Italy and Spain, so some positives. The rapidly deteriorating situation in the US will be one to watch in the coming weeks.
- We need to see economic data to reflect how bad the slowdown in consumer and corporate demand is to reflect an understand of the rate of change and potential damage to corporate cashflows and therefore the ability of corporates to service their debt and sustain dividends. This is now beginning to feed through, and the data so far is worse than anticipated. If the lockdown is extended it will only get even worse.
- We need to see manufacturing and services PMI data globally reflecting how bad the potential reduction in activity is, so as to try and ascertain the fallout in both employment and again earnings and cashflow. We have seen some of the impact in this month’s PMI’s, and continue to watch jobs data very closely. So far, 10m people at least lost their jobs in the last two weeks in the US, and this number is expected to continue rising.
For more information on this week’s US jobs data and what that means for the US economy, please see the attached Market Update document.
It is important to note that we are not waiting for absolute clarity, we are just waiting to see what happens next: whether we are getting to a bottom in data, or if it gets worse. We should have a view of this within a week to 10 days, therefore within that timeframe we may implement stage 1. So be prepared to again take some risk, and remember that this is a long term strategy.
Key Event We Are Watching This Week:
- Monday: German Factory Orders, UK and EU Construction data
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 attempts to grapple with the COVID-19 outbreak. Markets gained earlier in the week on stimulus hopes, before declining on economic data and developments in the coronavirus threat in recent days, resulting in mixed performances over the week. The gains posted by some indices over the week should not be taken as signs of a recovery however, with the global economy expected to continue to continue to suffer over the coming weeks/months as leaders attempt to contain the coronavirus.
Following our defensive moves in recent weeks, portfolio performance remained relatively flat over the week, with the higher risk portfolios able to gain as a result the small amount of remaining investment trust exposure within these portfolios. After an increase in cases around the world and new lock down measures in an attempt to contain the virus, we now see further risks ahead and expect to see a further decline from here in the near term as consumer spending and demand continues to be effected. The recent drop in portfolios and indices is hugely disappointing, however we are now defensively positioned amid rising downside risks and 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 1973, the first mobile phone call was made in downtown Manhattan, New York by Motorola employee Martin Cooper to the Bell Labs headquarters in New Jersey.
Have a great week and stay safe,
Jason & Gina