Our Investment Committee Update

We are not superstitious but what an extraordinary week to end on Friday the 13th. However, after the turmoil of the previous days there were signs yesterday morning that the markets have begun to regain some composure.

The rapid spread of Coronavirus has highlighted the vulnerability of our globally integrated economies to a modern pandemic.  We probably have to go back to the Spanish ‘flu that swept the world at the end of the First World War for anything similar. Stock markets do not cope well with uncertainty, and we have had uncertainty on a an unprecedented scale since the beginning of the pandemic. Perversely, the more aggressive the actions of the Central Banks and Governments have been, the worse markets have responded. It is as if they have decided there must be more bad news we are not being told.

However, not all the business sectors have been affected to the same extent. Those which have suffered the most are, as you would expect, in the travel, tourism and leisure sectors and about to be joined by sports. Oil companies and commodities have also suffered significant falls. The more resilient have included companies in the high-quality growth sectors, in particular such as Microsoft, Apple, Facebook who will in addition benefit from the undoubted changes in future business practices that will be adopted. There are already examples of businesses with large workforces telling their people to work at home for at least part of the week.

With regards to China and Asia, prior to the start of the outbreak we had taken the decision to increase our allocation to the Asian region in 2020. This has held up better than Europe, which has suffered most, largely because much of Europe’s capacity to survive another economic setback has been used up over the past ten years. For this reason we have no specific European exposure in our current portfolios.

In the US, President Trump has managed to make the situation worse than it already was by not implementing a full stimulus package, unlike what has been seen in the UK, China, Japan and elsewhere. In addition, President Trump’s surprise ban on travel from Europe, currently excluding the UK, made without consultation or notice, managed to escalate the fear of the unknown to new levels yesterday.

As referred to in our previous update, oil prices have fallen dramatically due to the failure of OPEC and Russia to reach agreement about future production levels. That fall in price, which was $60 plus per barrel early this year to the mid $30 now, would ordinarily be seen as a massive tax cut but not on this occasion, so far. However, there are rumours that China is planning to buy its entire next ten years supply within the next few weeks which would be a great benefit to its future economic growth.

The current views of the experts are that if the Chinese experience of managing the outbreak is repeated, then the number of confirmed infections will rise to a peak at the end of April and then begin to reduce.

As a Committee we have been constantly reviewing the latest news and data and evaluating various changes to the portfolios. The speed which new events have unfolded, sometimes by the hour, have made that task an ever-increasing challenge. Sovereign debt (Gilts), Index Linked and other Bonds have all held up well. On the other hand, Value Equity funds, which would normally be better placed to withstand volatility have suffered because of their high exposure to banks and oil companies, due to their strong balance sheets and high dividend levels. So, what would usually be more secure has not been so.

The conclusions we have reached, and which we believe are shared with the majority of our peers, is that now is not the time to sell equity funds and switch to other assets. In fact, we believe that would be the wrong call. There will be a recovery and it will be driven by trading companies and not Bonds and Fixed Interest funds, just as happened after the Credit Crunch in 2007-8. It is a time for us to plan how we sensibly and in a planned timescale, increase our exposure to equities to get the most benefit from the recovery when it begins. That is not for now, but we need to be ready for the recovery, and we will be.

We have a formal Investment Committee meeting in the coming week but we are also continuing to have ongoing discussions to monitor and assess the global response of all major Governments and economies to the virus.

The Fiducia Investment Committee

Fiducia Wealth Management