Q1 2020 Investment Review
Investment markets in Q1 started relatively quietly but exploded into action in mid-February as it became clear that coronavirus, and with it the terrible COVID-19 disease, was set to take hold in the developed West. In a matter of weeks, we have seen normally functioning economies go into virtual shutdown as governments around the globe try to fight this awful disease. Our normally busy cities and towns have been turned into ghost towns with all but essential services remaining open.
As a result, many investment markets have reacted badly. Government bonds being the only mainstream asset posting a positive return over the period. This is purely a “risk-off” trade, rather than a long-term investment position, with the benchmark 10-year UK gilt offering a return of 0.35% per annum at the time of writing.
UK equity markets have not fared well. Already having BREXIT concerns hanging over them, this additional concern saw the FTSE 100 tumble over 30%, before rallying to end the quarter nearly 24% down. Mid-sized companies, as represented by the FTSE 250, fell by over 40%, again rallying to end the quarter down by nearly 31%.
Volatility has been extremely high, with markets moving up or down by 5% plus on a regular basis. We have, however, seen some support in the FTSE 100. Every time it has fallen below 5000 points, it has quickly rallied back up above this level.
Credit markets (Bonds) were not immune to the sell-off. Returns varied wildly depending on the market perception of the likelihood of default. Higher yielding bonds have, in some cases, seen falls of 10% or more.
UK property has seen the market seize up. Property funds have all suspended trading as valuers have cited “material uncertainty” in valuations of the underlying properties. This suspension is to protect investors in the long-term, by stopping exits at current values. It seems likely that values will be written down in the coming weeks, at least until some normality returns to the market.
Governments in the UK and around the globe have stepped in to shore up markets and also protect citizens. In an unprecedented move the UK government agreed to pay 80% of wages to workers that had to be temporarily laid off due to the virus. In addition, huge packages to support businesses were announced. In the US, in just 2 weeks, ten million people applied for unemployment benefits. This trend is expected to continue to rise in the US, and in many other nations.
Global markets have fared a little better (in Sterling terms) than the UK market, although some of this is a direct result of Sterling struggling and seeing falls against the US dollar and other major currencies. Nevertheless, falls have still been in the 15-20% range.
The direction markets take from here will depend on how well governments are able to manage the virus and, ultimately, return life to some degree of normality. Some comfort can be taken from Asia where they do seem to be starting some semblance of normal life again, but it is still too early to say if this is successful.
Equity markets look cheap when compared with the past. However, that valuation is based on a level of earning that was expected before this crisis emerged. Many companies will see earnings plummet as their businesses have effectively been closed down overnight. This does not mean they cannot emerge from this, but the sooner things are brought under control the better the chances of a positive outcome.
Recent small rallies in price are encouraging as the markets clearly see a way out and a return to profitability in the future. It must be remembered that when buying equities, you are buying a share of profits for many years in the future, not just this and next year. When we do return to normal, there should be pent up demand to drive a significant rebound, although the scale of this will depend on how much damage has been done to businesses and consumers in the interim.
I hope that our next quarterly report will bring better news. In the meantime, we hope you and your families remain safe.