John Millican, Chairman
Posted in Fiducia News on 23.04.20
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The medical and scientific specialists advising the government now appear to be confident that, as a result of all the measures that have been taken and adhered to, there is a flattening of the curve of infections and in resulting deaths. As a result, we are entering a phase where there is increasing discussion about when and how the current restrictions on normal life should be lifted.

The unprecedented financial measures taken by governments and central banks have had the desired outcome of arresting the falls across global stock markets and since the latter part of March, stock markets have begun to stabilise. This does not mean that we are at the beginning of the end, but we are more likely to be at the end of the beginning.   The informed view is that we have been through the first phase of a severe market disruption and that is the phase of indiscriminate selling or panic. This was when there was no differentiation between relatively safe-haven assets and those which carry a much greater risk.   We are now in a more rational phase which reflects the fact that certain companies or sectors of the market are being assessed on their individual prospects. As the change in lifestyles has begun to unfold, we can see that certain businesses are less affected than others or have found themselves suited to, or better able to, adapt to the new normal. These include supermarkets, food manufacturers and suppliers, businesses that deliver online services and web-based solutions which are now greatly in demand as we have all been exhorted to work from home if possible. Whenever there is change there are also opportunities which benefit some sectors and those businesses that can adapt quickly and use valuable skills in a way that was never considered in normal times, such as Grand Prix teams designing and manufacturing ventilators for the NHS.

We are not virologists or even statistical modellers, but while we are appalled and saddened at the heart breaking stories of those who have been infected by the virus and especially those who have sadly lost their lives, our professional focus has to be on the economic and financial effects of this pandemic and what that means for our clients. However, it is also important to draw out that the current economic crises is not just as a result of COVID-19 and what has been somewhat over-shadowed, understandably, is the oil price war between Russia and OPEC with the USA somewhat on the side-lines while that confrontation plays out. The global oil price has fallen from 70 US dollars a barrel, firstly to circa 30 US dollars, which prompted an agreement between the two protagonists to reduce production in order to boost the price. However, the fall in global demand has taken the current price for Brent Crude, the accepted benchmark price, down to below 28 US dollars a barrel while US Crude is now just 20 US dollars a barrel, an 18-year low. Prices have collapsed by 60% since January to well below the break -even level for shale drillers in the USA while floating storage oil tankers are estimated to hold 160million barrels. In normal times a fall in the oil price is akin to a tax cut, but not on this occasion as it has added to the sense of uncertainty and concern.

The lockdown and social distancing measures that have been taken by most countries would appear to have been successful in controlling the spread of the virus and increasingly there is pressure on governments to explain how and when the lockdown will be eased. For example, Denmark and Germany are proposing to reopen schools, some shops are being allowed to open in Italy and Volkswagen has said that it wants to restart production at its European factories by the end of the month.

In another very recent development we have seen major UK companies and sectors cancel their dividends. The banks were told they had to do this and as a result some £7.5 billion of dividends went unpaid in order to preserve the capital base of the banks. Other sectors have announced they plan to do the same and this will have implications for equity income funds and income portfolios. We are currently working to quantify the expected effect and the action we can take to mitigate the consequences. There will be more on this to follow.

Although the outlook from here is grim at present it is important to recall there have been previous events that caused a dramatic upheaval in stock market prices, such as the oil crisis in the early 1970’s (it took 3 years to recover all losses), the bursting of the Dotcom bubble in 2000/01 which resulted in those new age companies losing 5 trillion US dollars in market capitalisation and a 50% fall in stock market values generally (2 years and 3 months to recover) and the global credit crisis in 2008 which saw a 48% stock market fall (4 years to recover). The cause in each market collapse was different and they were all severe and very scary. All were survived and followed by a period of strong recovery which should be an encouragement to stay the course and see it through.

Turning to our portfolios, we acted at the time of the arrest in falling markets which was the opportunity we had prepared for, a calculated and not a panicked response. We have not made any dramatic changes in terms of asset weightings but the objective was to turn down volatility where we could while taking the opportunity to add carefully selected new funds which we were able to buy at very attractive terms because of the initial market irrational behaviour. In that category are several leading Investment Trusts which we were able to buy at appreciable discounts to their net asset values. These include Capital Gearing Investment Trust, Finsbury Growth and Income Investment Trust, Monks Investment Trust and Scottish Mortgage Investment Trust. At the same time we took out our direct exposure to Japan, India and China in order to focus on Emerging Asia. We have increased our holding of Polar Healthcare and increased out exposure to Private Equity as there will be good companies with cash flow issues that will need to be rescued as the global economy begins to recover. Banks cannot be relied on in a crisis, they do not offer umbrellas when it begins to rain. We have also sold two passive funds because they hold the entire Index they are following, such as the FTSE 100, regardless of the prospects of each individual company. The membership of the Index is based on historical performance which may now be highly irrelevant. We believe the immediate future is a time when selective stock picking is essential.

We took the opportunity to increase our cash weightings to 20% for the Prudent portfolio, 16% for the Balanced, 14% for the Growth and 10% for the Adventurous. Our traditional house view is to be fully invested at all times, but we wanted to retain some cash reserves so that we can make further tactical acquisitions once we detect markets are in an early and sustainable recovery mode.

The Investment Team and Committee are constantly monitoring what has been so far a rapidly changing kaleidoscope. We will issue further regular updates so that you are kept informed of our views and analysis as the future unfolds.

We understand that a great many of you found the recent audio podcast by Michael Hughes, which is published on our website, to be helpful, informative and reassuring; we are pleased to say that Michael will be recording similar updates at regular intervals which will also be published on our website. However, should you have any questions or concerns that we have not covered do not hesitate to contact us.

Everyone at Fiducia sends their very best wishes at this difficult and challenging time and we sincerely hope you remain safe, healthy and fit.


John Millican, Chairman.




John Millican, Chairman
Posted in Fiducia News on 23.04.20

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