AUGUST 2020 Market Report
During one-month period to 31st July 2020, major equity markets, as measured by the aggregate FTSE All – World Index rose by around 6% but there was very considerable variation country by country. The S&P index, led by the tech sector, and Asia ex Japan rose, while Japan and Europe were relatively flat, and the UK equity indices fell. In sterling adjusted terms, most major indices fell over the month. The VIX index now stands at a level of 25.4, declining over 17% during July. Gilts were hardly changed. The US dollar was the major currency story over the monthly period falling sharply versus the Euro, Sterling and the Yen. Commodities rose across the board.
Aggregate world economic forecasts recent produced by the IMF, OECD and World Banks point to a 2020 GDP decline of approximately 5% -8%, the bulk occurring in Q2 2020 with developing economies affected more than emerging zones. Reporting on 31st July, both USA and Germany reported second quarter GDP declines of approximately 10%, with other European economies experiencing even sharper declines. At the time of writing however, recent economic sentiment indicators are showing are showing selected pick up’s in economic activity. Many Asian countries led by China are showing good recoveries while Europe and USA continue to draw back from strict lockdown measures. but caution is the still the watch word and fears of a second wave are not completely unfounded.
Local Covid outbreaks are necessitating controversial lockdowns and in certain parts of Latin America, the first wave peak does not appear to have been reached.
At the FOMC meeting 29/30 July, US interest rates were held close to zero and “depending significantly on the course of the virus “pledges were made to do more to support the economy if necessary.Next Friday’s employment figures will be of very special interest.
Massive official support measures, whether monetary or fiscal, e.g recent European 750 Billion Euro package are still being utilised to soften economic collapse notwithstanding longer term debt issues and political wrangling.
Although further from investor concerns now, growing concerns regarding global trade tensions (many), government debt (over 100% Debt/GDP), China/Hong Kong tensions BREXIT, and US election (Trump slipping) are not far away.
Within the UK, a May GDP rebound of 1.8%,well below expectations following the record 20.4% decline in April of 20.4% illustrates the severity of the decline measured by historic official figures and was was one of the highest recorded amongst the developed nations. Recently released NIESR data expects an output decline of about 10% for the full year 2020. Sentiment and live activity measures produced late July show a pause after a spike in spending on air tickets, food and drinking outside the home, and a continued cautious mood regarding “delayable” spending.
The overall picture is still one of depressed activity and one major financial concern is that government support runs out before a level of activity to support the labour market is reached. Companies continue to shed jobs and many survey participants reported that redundancy measures were operating in tandem with furlough schemes.Begbie Traynor, the insolvency specialist recently cautioned that the double whammy of accruing liabilities and the withdrawal of state support schemes this autumn could lead to insolvencies greater than those experienced in 2008.
Initial analyst estimates expect an average global corporate earnings decline of around 20%-30% in 2020 with many countries experiencing a similar decline in annual dividend income. In aggregate forecasts for Asian companies show more resilience in both earnings and dividend growth
Global Equities showed gains over July ,2020. The FTSE ALL World Index registered an advance of around 6.1% over the month and is now down approximately 2.0% since the year end, in dollar terms. The UK broad and narrow market indices, both fell by approximately 4.0% respectively, now underperforming the sterling adjusted world index by over around 21.0% since the beginning of the year. Above average monthly performance was registered by the S&P, NASDAQ, Asian and various emerging market indices. Germany and Japan remained relatively flat. The VIX, now at a value of 25.4, remains below 30, suggesting increasing risk tolerance, but still far from a “comfortable” level.
July was a very volatile period for UK sectors, mostly showing absolute price declines. Mining shares were one of the few areas to show appreciation, especially if precious metal related. By contrast, oil and gas,telco and bank shares registered falls of over 10%.Since the beginning of the year the FT pharmaceutical sector is the only major sector showing an absolute gain . The “average” UK equity major UK indices. Income trusts continue to underperform smaller companies (Source:Trustnet 1st August)
Gilt prices barely moved over the month, the 10-year UK yield standing at 0.10% currently. Other ten-year yields closed the month at US, 0.55%, Japan,0.01%, and Germany, -0.53%.Corporate bonds outperformed gilts significantly , the UK SLXX ETF gaining 1.81%.Elsewhere,more speculative bonds showed larger yield declines, local emerging market bonds now yielding 5.14%. See my recommendations in preference shares, corporate bonds, floating rate bonds, speculative high yield etc. A list of my top thirty income ideas from over 10 different asset classes is also available to subscribers.
The weakness in the UD dollar was one of the major monthly features (corona virus, interest rates Chinese/US tension, election) with weakness of 5% and 6% against the Euro and Sterling respectively. Year to date the Euro now shows a gain of 5.5% versus the US dollar.The closing level as at 31st July was 1.183.
A generally positive month for commodities led by oil and copper, with weakness in some soft’s, platinum, palladium and coal. Year to date the major features are the strength in uranium and gold, and the weakness in oil and coal.
Over the coming period, the one certainty continues to be “uncertainty” regarding the containment of corona virus and the huge human cost. While more signs of economic stabilisation are appearing currently, there is a wide range of future outcomes, and the outlook for corporates is both variable and uncertain. Earnings estimates for 2020 have been downgraded aggressively while the timing and magnitude of any bounce back makes forecasting, using conventional metrics, a hazardous exercise! The reliability of “E” in the PE ratio will be brought into question, asset value write downs will be significant and dividends will be constrained both for financial and moral reasons. Fraudulent activities are also more likely to surface e.g Wirecard. Certain sectors will be subject to state intervention, while others may succumb to administration or opportunistic take over. Longer term changes in consumer habit will also affect corporate fortunes e.g home working.
Following the format of last month, I make the following observations.
- SECTORS-Pharma has been one of the consistently stronger sectors this year and although the COVID test/vaccine product news highlights certain producers, the strong balance sheets and defensive product portfolios seem likely to keep the whole sector of interest. Note that some energy related corporate bonds have lagged the oil price recovery and look interesting for income and capital gains. Mining stocks may also be of interest with a growing number of underlying commodities responding to global growth impulses while precious metals are also seeing strong interest. In the more defensive market environment, which I expect, certain utilities are worth revisiting for maintained, or even increased, dividend payments, stable business and growing ESG credentials, although regulation/government interference should be considered. Technology holdings should be maintained but be aware of some stretched valuations, tax issues as well as non-financial developments e.g Facebook,Twitter. Much of the banking sector specific i.e. ultra-low interest rates, dividend deferrals, debt provisioning and stock specific e.g HSBC news, now seems priced in, with many bank names trading well below book value, although domestic banks e.g Lloyds will remain strongly associated with UK COVID developments. In many cases bank preference shares offer higher yields and better capital security now. Clearly a very selective approach is needed in the area of retail, hospitality and travel.
- I have identified certain COVID specific equity plays, both loser and beneficiaries, several which are intuitive, and their respective performance does mirror the certain risk on/risk off moods exhibited by the markets. However extra due diligence is required at stock level as immediate cash flow/balance sheet/government intervention issues have to be considered in the short term, as well as the fact that some sectors will face irreversible longer term changes, even once the Covid virus disappears. Over the last month, there has definitely been more relative interest in the more defensive plays, now showing a loss of “just” 10% since the high and a bounce of 45% since the March low…compared with -57% and +21% for the higher risk names.
- Emerging Markets-Very difficult to adopt a “blanket” approach to the region with so many different COVID, commodity, debt,geo-political variables.Much of Latin America is experiencing an acceleration in COVID cases, as is India, while closer to home Turkey faces a worsening currency situation However I have a relatively favourable view on Vietnam where the macro factors (COVID success, economic GROWTH!), stable FX,inward investment are positive features.Russia,both bonds and equities, may appeal to value, income oriented investors and actually enjoys a relatively favourable current/fiscal balance situation Please contact for my favoured pooled investment play.
- Not on near term investor (or government!) worry lists but be aware of the huge government DEBT problem building. Latest figures show aggregate debt in excess of GDP at the global level. Apart from short term haven buying, I expect conventional government FIXED INTEREST to suffer in the long term, but other fixed interest options are available. Within the UK gilts sector, it should be noted that increased supply is occurring at the same time as reduced monthly QE buying. Beware using ETF for certain corporate debts, and even certain OEIC’s.
- FX- The major development during July was the weakness in the US dollar, partly on relative interest rates, partly relative virus developments and partly ongoing political tensions. The Euro was one of the major gainers rising from $1.123 to $1.183
- COMMODITIES-Gold remains in positive territory, although there are very mixed views on inflation. There are growing signs that gold jewellery demand has been falling quite sharply I.e recent price rise fuelled almost entirely by investment flows. In several varying areas, supply demand distortions are creating very volatile conditions e.g WTI oil, uranium, palladium, coal. In a UK context it might be worth remembering that plantings and pickings will be disrupted by both weather and labour shortages, which could potentially lead to pockets of food inflation.
- COMMERCIAL PROPERTY…The last few weeks have seen news from the commercial property sector (Intu woes,Land Securities, British Land,TR Property, etc),and the key takeaways seem to be very much as anticipated i.e. Further large write downs and weak rent collection in most things retail (excl food retail), steadier but fragile London offices, and strong developments in the areas of logistics, healthcare and storage. European statistics are generally more favourable than UK. Student accommodation, a former investment favourite, is taking a hit from both domestic and international demand. Extra due diligence is currently required in this sector both by asset type (direct equity, investment trust, or unit trust (although most of these locked in now!).Many property funds are continuing to charge fees, despite being in “frozen” mode, another source of investor angst. The FCA is also looking into Councils who have been active in the sector (horses…bolting etc).Expect some embarrassing news here!
- HEDGING. Lower volatility may make certain hedging strategies more affordable
Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced, adventurous, income,COVID specific), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring and analysis of legacy portfolios.
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
2nd August 2020
Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions - investors should conduct their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' regulatory filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.